House and Senate leaders say they will not take up the state budget again until 2026, leaving North Carolina as the only state in the nation without a budget at this point. Here are some suggestions to help resolve the big issues.
Corporate Income Tax
I applaud the Senate and the House for continuing to reduce corporate income tax to zero. That is a small part of our revenue. It is a double tax on the same income. It is a highly regressive tax. By continuing the law that it goes to zero, corporations can invest here with confidence that by the time they start making money, that irrational double tax will not be one to consider. Democrats might squeal, but it is the right policy.
Personal Income Tax
There are three problems with the Senate position on “triggers” to determine future income tax cuts.
The triggers were not adjusted for inflation or for an increase in the population. Those adjustments are normal for a “TABOR” (Taxpayer Bill of Rights) calculation on spending. The effect of not adjusting the triggers for inflation and population is to illogically reduce tax rates long before anyone anticipates (or should have) the effect. We know that the federal government is sending less money to North Carolina.
As pointed out by John Hood (article), the effect of this premature reduction in income tax rates is to fill the unmet serious needs of state government with excise taxes on gambling, alcohol, tobacco, and marijuana (why not taxes on prostitution?). Regardless of your moral position on these activities, the taxes violate basic principles of tax policy such as stability and transparency. Each are highly regressive. “Don’t tax me; don’t tax thee; tax the fellow behind the tree,” is the theme.
The Senate position is based upon an economic and logical fallacy as well as a one-way anomaly. When we reduced personal income tax in 2011-2013 from almost 8% down to 6%, more revenue came in. Why? We were the highest income tax rate amongst our neighbors and competitors. These high rates dragged down economic growth. When the income tax rate was reduced from 6% down to 4.5%, more revenue came in for similar reasons. It is magical thinking that reducing income tax rates further, down to 3.5% or 2% will produce more revenue.
The personal income tax has been and still is half of the receipts for the general fund. The nonpartisan staff has projected a structural fiscal cliff coming up. It is obvious to me that there will be diminishing returns from further reduction of personal income tax rates below 4%.
Senate negotiators claim that the House is violating a 2023 agreement. Aside from the obvious fact that one assembly can not bind another, it is useful to note that the Senate passed its budget first, violating the 2023 “agreement” before the House did.
Tips and Tax Holiday
I [dis]agree with the Senate position on taxes on tips and the resurrected Sales Tax Holiday. These make no sense. There is no reason to tax tips differently than other taxes on income. A Sales Tax Holiday is just a gimmick. Parents buy school supplies year-round now. The “Big Beautiful Bill” provision on tips is a shadow of its title. The effect, if serious, is that workers will just classify more of their income as “tips” rather than as a bonus or other ordinary income.
NC Innovation
Giving $500 million in state funding to NC Innovation was a terrible idea from the start — corporate welfare run amok. The Senate now realizes that. The House position is better.
Masters Pay
I agree with the Senate. I spent 16 years on education committees. All the evidence I saw was that masters pay did not make any difference in the effectiveness of teachers. Trim that item down so that is only applies to physics, chemistry, and special education teachers. General education or liberal arts masters pay is a waste of money.
These are just my humble suggestions to solve the budget impasse.
