Tax cut fever threatens core services

Published April 28, 2017

by Steve Ford, NC Policy Watch, April 26, 2017.

How many times do we have to say it? Well, it’s worth repeating – especially in the aftermath of recent income tax filing deadlines, when the subject becomes a sore point for many: None of us should have to pay more in taxes than our fair share in financing the necessary and desirable tasks of government.

But what sounds like a clear-cut standard is of course complicated by a tangle of conflicting opinions and ideologies. What’s “fair,” “necessary” and “desirable”? Depends whom you ask.

From the Council of Churches’ perspective, fairness requires those with greater means to carry a heavier share of the load – i.e., to pay at higher tax rates.

And the revenue generated by a fair and adequate tax system must be sufficient to finance levels of public services that can improve the lives of all citizens, whether urban or rural, rich or poor. Those services that extend opportunities and protections to those saddled with the disadvantages of poverty cannot be shortchanged.

That sets the stage for what has become North Carolina’s annual debate over tax cuts favored by the conservative Republicans who rule the General Assembly.

The debate unfolds as crucial decisions also are being made about the proper scope of state spending. The two sets of issues, taxation and budgets, are inextricably linked.

Tax-cutters have to come to terms with how their policies make it harder to spend — which of course may be their goal. Frankly, it’s a goal that reeks with the self-interest of those fortunate enough not to have to rely on the public sector for good schools, health care, protection from environmental threats – and who don’t want to pay a dime more in taxes to benefit those who hope public programs will boost their chances to thrive as productive members of society.

Already, cuts in individual and corporate income taxes put in place over the last few years have drained some $2 billion from the state’s revenue stream, compared to what would have been raised without the cuts. The biggest winners have been upper-end earners, which from a progressive standpoint adds insult to injury. As does a corresponding shift toward greater reliance on the regressive sales tax. (No doubt you’ve appreciated that extra sales tax charge so your favorite car mechanic could keep your ride up and running.)

The sales tax shift has cushioned overall revenue losses to a degree, as have revenue gains attributable to economic growth amidst recovery from the Great Recession. But there’s simply less money for budget-writers to work with than there otherwise would have been.

So, for example, when legislators mandate reductions in public school class sizes, they decide to pass the costs of extra teachers and classrooms to local school districts and the taxpayers who finance them. Or – and this is now generating a huge and well-justified pushback – districts say they’ll have to drop arts and phys ed programs in order to pay for the additional teachers in regular classes. Why should such a choice ever have to be made?

Catchy title

Now comes Senate Bill 325, dubbed by its Republican sponsors as the “Billion Dollar Middle Class Tax Cut.” Actually, the legislature’s Fiscal Research Division pegs the amount of revenue that would be forgone under the bill as starting at $323.7 million during the fiscal year that begins July 1 and growing to $839.6 million in fiscal 2021-22. But there’s at least a billion bucks in there somewhere, even if not in a single year.

As to the middle-class angle, yes, some mid-range earners would see their income taxes go down a little more. The personal income tax – now levied at a flat rate, not according to brackets that mean higher rates for those with high incomes – would drop from 5.499 percent to 5.35 percent. Obviously, that means a bigger break for millionaires than for people struggling to afford the basic trappings of a middle-class lifestyle.

An increase in the standard deduction, from $17,500 to $20,000 for married couples filing jointly, would help people with modest incomes. But meanwhile, the deduction for mortgage interest and property taxes, which now is capped at a generous $20,000, would be made even juicier by raising the cap to $22,000. That’s a boon to rich folks, plain and simple.

The bill also would continue the Republican legislature’s relentless whittling away at the corporate income tax. According to the appended fiscal note, that tax rate prior to 2014 was 6.9 percent. Now it’s 3 percent.

S.B. 325 would lower the rate first to 2.75 percent, then to 2.5 percent beginning in 2019. Corporate taxes should not be so out of line on the high side as to become an economic drag. But the benefits and services funded through adequate taxes — good universities, for example — are typically just as important in creating a good business climate as are taxes that are kept minimal. De-emphasizing the corporate tax just ends up putting more pressure on taxes paid by individuals, as well as more pressure on the budget. This is a trend going in the wrong direction.

Budget squeeze

It’s true that the legislative staff predicts revenues will run 4.5 percent ahead of expectations for the next two fiscal years. But those expectations were dialed back to reflect previous tax cuts. S.B. 325 would take another bite. And naturally that would make it harder to meet spending demands.

One news report, citing a legislative staff analysis, says that with the additional cuts in place, budget shortfalls will arise beginning in the 2018-19 fiscal year. By 2021-22, the gap between revenues and what would be needed to fund ongoing services at present levels is estimated at $598.9 million, says that report in The News & Observer.

So how would such a gap be closed? With the current batch of legislative chiefs, spending cuts no doubt would be preferred to a corrective tax increase. Gov. Roy Cooper, who opposes S.B. 325 and who’d rather see any extra revenue put toward more meaningful middle-class tax relief as well as investments in education, presumably would have a different view.

The tax-cut bill isn’t the only cloud looming as the state Senate and House prepare to wrestle with the next state budget. The White House of President Trump is signaling a push for major cuts in domestic spending. Whacking federal environmental protection funds, for instance, would send dangerous ripples toward North Carolina, which relies on that money to help finance its own anti-pollution efforts.

Then there’s the massively ill-advised effort to lock a spending cap into the state constitution. The so-called Taxpayers’ Bill of Rights, House Bill 727, would limit any increases in the state budget to the national rate of inflation plus the state’s rate of population growth. Only by two-thirds votes in both legislative chambers could the limit be exceeded. The key problem is that with spending already squeezed to painful levels, long-standing needs, especially in the education arena, likely would continue to fester.

That bill — which would lead to a referendum on the constitutional change — was introduced only recently, but a similar measure has come close to enactment. S.B. 325 cleared the Senate on April 5 and is undergoing committee review in the House.

This is the time for legislators to put small-government ideology aside and consider the real impact of digging their tax-cut hole even deeper. Yes, the impact on ordinary North Carolinians for whom the affluence enjoyed by so many in our prosperous cities is just a mirage, and who wish their luckier neighbors would take their needs seriously and pay the necessary freight.

Steve Ford, former editorial page editor at Raleigh’s News & Observer, is now a Volunteer Program Associate at the North Carolina Council of Churches.

http://www.ncpolicywatch.com/2017/04/26/tax-cut-fever-threatens-core-services/

April 28, 2017 at 10:53 am
bruce stanley says:

Steve,

I thought church tithes were 10% of income, like the 5.49% flat tax in NC.