by Brian Balfour, Civitas Institute, June 29, 2015.
North Carolina’s historic 2013 tax reform drastically improved our state’s tax climate, making the Tar Heel State far more competitive for job and investment growth. The Tax Foundation credited the tax changes for North Carolina’s dramatic increase from the 7th worst business tax climate in the nation to the 17th best.
But House Bill 549, the Tax Restoration Act, would reinstate the 7.75 percent rate on incomes above $1 million, creating an additional tax bracket to the flat rate of 5.75 percent on personal income in place since the 2013 reforms.
Reinstating a top rate of 7.75 percent on the state’s personal income tax would once again give North Carolina the highest top income tax rate in the Southeast, and one of the highest in the nation. Why do these legislators want to go back to the failed policies of the past?
Sponsored by Reps. Cecil Brockman (D-Guilford), Pricey Harrison (D-Guilford), Verla Insko (D-Orange) and Paul Luebke (D-Durham), this bill is one probably motivated by envy, because it sure makes for bad economics.
The majority of people in North Carolina earn less than $1 million of income, and may believe that such a tax bracket would have no impact on them. But that overlooks the real victims of this tax hike.
Sound economic analysis of taxes enables us to realize that the true burden of taxes is not borne merely by the one who legally writes the check to the revenue department, but is more difficult to trace. Economists understand that changes in taxes alter the incentives of behavior, and as such alter economic activity. The real question is: Who bears the burden of these changes in economic behavior?
In the case of taxing high-income earners, many of them are small-business owners. Moreover, high-income individuals have more options and are thus more mobile than middle- and lower-class income households. When faced with a stiffer penalty on the earning of more income, the response will be less investment in job creation by small businesses and more high-income individuals moving to another state.
For instance, Maryland’s 2007 millionaire tax drove thousands of high-income people from the state, taking with them all the money they pump into the local economy, destroying jobs held by middle-and lower-income workers.
The bottom line: Taxing “millionaires” will not harm the millionaires. If they stay in North Carolina and pay the higher tax rate, they will still be rich. They just may not expand their businesses, and they will have less money to spend and support the jobs of others. Or they will move to another state that allows them to keep more of what they earn. Either way, they’ll be fine. But ordinary workers and families will suffer.
The real victims of a “millionaire” tax are those who bear the burden of the changes in behavior by those responding to the changes in incentives created by the tax.
Indeed, the true burden of creating a new, higher income tax rate on high-income earners falls on the middle- and lower-income families who lose jobs and opportunity when North Carolina’s economy stumbles due to the loss of an important component of the state’s economy.
Because it is driven by envy that blinds its sponsors to the true burden that would fall hardest on the state’s low-income households, House Bill 549 is this week’s Bad Bill of the Week.