NC Tax changes unlikely to spark boom

by Ned Barnett, News and Observer, December 29, 2013.

You’re lucky if you got a bigger wallet for Christmas. You’re going to need it in 2014 to carry your extra take home pay.

At least that’s the line state Republicans are pushing about changes in tax laws they passed last session that take effect Jan. 1.

The changes include replacing the three-tiered income tax rates of 6, 7 and 7.75 percent with a flat rate of 5.8 percent, dropping to 5.7 percent in 2015. Other changes include a cut in the corporate tax rate, an elimination of the estate tax that applied only to estates worth $5 million or more and an end to the earned-income tax credit, a tax break that helped the working poor, including many military families.

This is all for the good, Gov. Pat McCrory said in his end-of-the-year message: “Thanks to the historic tax reform we passed, North Carolinians will be able to keep more of their hard-earned money in their paychecks starting on January 1st. These reforms will also make North Carolina more competitive in attracting job creators to our state.”

The American Legislative Exchange Council is crowing about the changes, too. The conservative group that has particularly clear access to North Carolina’s Republican leaders (House Speaker Thom Tillis was a 2011 ALEC “legislator of the year" and is an ALEC board member). ALEC says that the tax changes here are a blueprint for spurring economic growth that will lift people of all incomes.

Under ALEC’s formula for rating the most competitive states, the tax changes taking effect will lift North Carolina from 22nd to fifth and perhaps as high as fourth if the full corporate tax cut is phased in.

In a glowing review of the changes, ALEC’s Will Freeland wrote last summer, “The human impact of these reforms cannot be overstated: More money in taxpayers’ wallets, greater opportunity for North Carolinians suffering in poverty to find gainful employment, more opportunities for citizens to become their own boss by starting their own business, and fewer North Carolina citizens pulled away from their families and home state in order to look for opportunity in states that have embraced a stronger pro-growth agenda. As reform crosses the finish line, North Carolinians are again to be commended for picking prosperity.”

So there you have it. Come the New Year, North Carolinians ought to skip the wistful “Auld Lang Syne” and erupt in a rousing GOP version of “Happy Days Are Here Again.”

Unfortunately, all the optimistic talk about tax changes bringing an economic revival in 2014 is likely to last as long as most New Year’s resolutions.

Democrats and progressive groups have panned the tax changes as a boon to high-income earners and profitable corporations. They say the cuts will actually increase overall tax payments by the middle- and low-income people and further starve an already pinched state budget.

In a report on the tax changes, Cedric Johnson, a policy analyst with the North Carolina Budget & Tax Center, writes, “The plan consists largely of cutting tax rates for personal and corporate income, in a way that will overwhelmingly benefit the wealthy, and does little to rid the tax code of costly tax loopholes. The result will be a significant loss of revenue and a greater reliance on the sales tax, whic hits middle-class and low-income taxpayers the hardest.”

The eventual effect of the changes likely will fall somewhere in between ALEC’s and the Budget & Tax Center’s predictions. In that place between is where you’ll find Douglas A. Shackelford, a professor of taxation at the UNC-Chapel Hill’s Kenan-Flagler Business School.

Shackelford thinks the Republicans moved in the right direction by cutting the income tax rates .

“We were out of line with other states around us,” he said. “The individual tax rate had gotten too high.”

Even liberals supported a lower income tax rate, but they wanted it lowered through elimination of loopholes that would reduce taxes for most people without reducing revenue to the state.

That’s not what happened.

“The term ‘radical reform’ was tossed around. We didn’t come anywhere close to that,” Shackelford said. He added, “We didn’t have tax reform. We had a tax cut. That’s always going to mean that the people who pay high income taxes will enjoy the benefits.”

What the changes failed to do, Shackelford noted, was expand the sales tax to include more services that play a large part in today’s economy.

Shackelford likes that the tax changes include capping total deductions for mortgage interest and real estate taxes at $20,000. He thinks state and federal tax codes could more fairly distribute the tax burden by moving away from generously subsidizing housing. And he likes the elimination of the estate tax. He said it won’t cost much in lost revenue and it reduces the tax code’s complexity.

While he supports some of the tax changes, Shackelford doesn’t expect the economic impact the governor and other Republicans anticipate.

“I wish I was so optimistic,” he said. “I’m not very confident we’re going to to see a huge explosion in the economy.”