North Carolina taxpayers could be out almost $9 billion if the Bush-era tax rates and a patch for the Alternative Minimum Tax aren’t extended, a report by the Tax Foundation says. Nationwide, the total tax relief is estimated to be $403 billion, or about 2.7 percent of the economy.
The Democratic-controlled U.S. Senate and Republican-controlled U.S. House have approved differing versions of an extension, which would have to be reconciled by the end of the year to prevent the tax cuts from expiring.
Congress is in recess now and isn’t expected back until after Labor Day. A public policy expert at The University of North Carolina at Chapel Hill expects that Congress won’t act then, but instead will wait until a lame duck session after the November election.
“It’s become a campaign issue, so you really can’t, as a matter of policy, know what’s going to happen until after the election,” said John Scott, an assistant professor of public policy at the university.
Supporters of extending the cuts have labeled the potential fallout of not extending them “Taxmageddon.” Scott said that higher taxes could have a detrimental effect on the economy, which is still trying to recover from the Great Recession.
“On average, higher tax rates will affect the economy negatively,” Scott said.
Scott said not extending the cuts could have a negative impact on both consumption and investment. “It reduces the after-tax spending power of the consumers,” Scott said. “At the upper income level, it reduces money they can use to invest in their businesses.”
A major sticking point in Congress is whether to continue extending the tax cuts across the board or whether to allow the cuts to expire for wealthier Americans. The GOP-led House wants an across-the-board extension. The Democratic-led Senate prefers extending them for some Americans, but not the wealthiest.
Fergus Hodgson, director of fiscal policy studies at the John Locke Foundation, said that putting a heavier tax burden on wealthier individuals could hurt productivity.
“This is particularly destructive because it would discourage productive activity, encourage more individuals to leave the United States entirely, and it would reduce investment, since wealthy individuals tend to invest rather than consume such a high proportion of their incomes,” Hodgson said.
Failing to extend the tax cuts could cost North Carolina taxpayers approximately $4.8 billion in 2013, the Tax Foundation report said. That would be an average of $1,130 per tax return and represent nearly 2.3 percent of the state’s income.
Not extending the AMT patch would nearly double the hit to North Carolina taxpayers. The Tax Foundation estimates that the combined hit of not extending the tax cuts and the alternative minimum tax patch would be $8.9 billion in North Carolina.
The AMT, enacted in the late 1960s, was aimed at fewer than 200 of the wealthiest Americans who had avoided paying federal income taxes completely. However, the tax was not indexed to inflation, and if the patch is not extended, up to 25 million Americans could see huge increases in their tax payments.
While the Tax Foundation’s report focuses on taxes, both Hodgson and Scott say that once the tax cuts get extended, lawmakers should turn their attention to resolving the federal debt issue. The U.S. debt is about $15.9 trillion, according to USDebtClock.org.
“At some point, we’ve got to deal with that,” Scott said.
“This tax debate is unfortunate, since the real debate ought to be about spending levels,” Hodgson said. “In the end, all spending must be paid for, even if legislators defer that to future generations or conceal it through higher rates of inflation.”
Barry Smith is an associate editor of Carolina Journal.