Judge’s error offers opportunity for lesson about taxes

It’s no easy task to find the silver lining behind a recent court ruling striking down two N.C. state constitutional amendments.

But this observer has found at least one: The ruling offers a good excuse to remind readers about basic facts involving taxes.

Facts contradict a key “finding of fact” that helped motivate Wake County Superior Court Judge Bryan Collins’ decision to kill the amendments. Specifically, the facts paint a far different picture than the one suggested by the 33rd “fact” spelled out in Collins’ 14-page order.

In November, 2 million N.C. voters (57 percent of those casting ballots) decided to lower the state’s constitutionally mandated cap on income tax rates. The cap established in Article V, Section 2(6) of the constitution had been set at 10 percent. Voters agreed to drop that cap to 7 percent.

That vote had no direct impact on existing tax rates. At the time of the vote, the state’s flat personal income tax rate stood at 5.499 percent. The corporate income tax rate was 3 percent. Both rates fell in 2019, to 5.25 percent and 2.5 percent respectively. But those decreases were tied to other legislation, not the constitutional amendment.

Both before and after the vote, neither tax rate came anywhere close to 7 percent, let alone the 10 percent rate in the original cap. The General Assembly could raise the current personal income tax rate by 33 percent before butting up against the 7 percent cap tied to the amendment. Lawmakers could nearly triple the corporate rate before hitting the new cap.

Yet Collins states, as fact, that the amendment harms the plaintiffs in the case before him: the N.C. NAACP and its members. How? “Because the amendment places a flat, artificial limit on income taxes, it prohibits the state from establishing graduated tax rates on higher-income taxpayers and, over time, will act as a tax cut only for the wealthy.”

The judge goes on to state, as fact, that the “artificial limit” tends to favor whites and “disadvantage people of color.” Hence the perceived harm to the NAACP.

My John Locke Foundation colleague John Hood has labeled the judge’s assertion “both offensive and factually inaccurate.” Hood backs up those words by disputing Collins’ implication that recent state reforms benefit only white, wealthy taxpayers.

One can offer at least three more basic critiques of Collins’ 33rd “fact.” First, the amendment does not place a “flat, artificial” limit on income taxes. Instead It adjusts an existing constitutional cap on the top tax rate the state can charge.

If one treats a cap as “flat,” and if the flat nature of that cap violates some constitutional protection, then no cap would be permitted at all. Not only would the new 7 percent cap fail Collins’ test, but the pre-existing 10 percent cap would have to disappear as well.

Perhaps Collins meant to distinguish between 7 percent and 10 percent by using the word “artificial.” But there is no factual basis for that distinction. If a 7 percent cap is artificial, nothing about the old 10 percent cap would allow it to escape the same label.

Second, the amendment sets no prohibition on the state establishing graduated tax rates. This is indisputable. It would be a bad idea for lawmakers to jettison their growth-enhancing flat tax. Yet a future — presumably Democratic — General Assembly would be free to do so.

For example, lawmakers could maintain the existing 5.25 percent tax rate for income up to a certain threshold, then raise rates as high as 7 percent for income beyond that threshold. Such a decision would have negative impacts for the tax code’s simplicity. It could slow economic growth. But the amendment leaves lawmakers free to make that unwise choice.

Third, it’s not possible to argue with a straight face that an amendment that does nothing to affect current tax rates amounts to a tax cut. The amendment itself generates no tax cut for the wealthy or for anyone else, either now or “over time.” Only future action from the General Assembly will raise or lower tax rates.

Collins’ “facts” clearly fall short of meeting a factual standard. Yet the story need not end at that point.

The judge’s findings suggest he takes issue with a state income tax structure that would enable the wealthy to avoid paying a larger tax burden “over time.” Perhaps he’ll be happy to learn that North Carolina’s existing tax structure — including its single flat rate — already requires higher-income earners to pay substantially more than those with lower incomes. That situation is likely to continue “over time.”

Thanks largely to regular increases in the standard deduction since 2013, lower-income earners have seen substantial portions of their tax burdens sliced away.

Under current law, a childless married couple with $25,000 of income faces a state income tax bill of $262 (roughly 1 percent of household income). A couple with income of $120,000 pays $5,250 (4.4 percent). A couple earning $1 million pays $51,450 (5.1 percent). That million-dollar household faces a tax bill roughly 200 times as large as the couple making $25,000. Add children to the equation, and the numbers look even better for the couple with the lower income level.

The tax cap amendment did nothing to change those relative tax burdens. Nor would the amendment prevent a future General Assembly from raising the standard deduction again in the future.

It’s too bad those facts didn’t find their way into Collins’ “findings of fact.” Perhaps higher courts will prove more receptive to evidence that challenges his recent ruling.

Mitch Kokai is senior political analyst for the John Locke Foundation.