To fix the tax-reform bill, NC lawmakers must face the facts

by Alexandra Sirota, director of NC Policy and Tax Center, published in News and Observer, November 23, 2013.

Last week, North Carolina policymakers decided the tax-cut bill they passed just four months ago created enough confusion to require new legislation to clarify and “fix” it. The problem is their “fix” does not address the fundamental problems with the tax cuts.

The tax cuts will significantly reduce resources for public schools, courts, public health and job training even if the new legislation is enacted. Worse, while the new legislation helps clarify how the sales-tax expansion will work, it fails to remedy the glaring flaw that middle- and low-income taxpayers will, on average, pay more in taxes as a share of their income than millionaires because massive income tax cuts were paid for by a shift to a greater reliance on the sales tax.

Even though the most significant tax changes in the original bill have not been implemented yet, the bill’s impact is already becoming apparent in classrooms, courtrooms and county offices. Students are spending less time in front of teachers because of cuts to funding for teacher assistants and the removal of the cap on class sizes. Courts are taking longer to process cases, and fewer dollars are available to ensure legal representation for those who can’t afford to pay for it themselves. Tuition at community colleges and public universities has increased as state higher education spending has decreased and financial aid has fallen, putting college out of reach for many North Carolinians even as a growing number of jobs are expected to require a degree.

This is just the beginning. Policymakers had to account for where they would cut a combined $525 million over the next two years to make up for revenue lost to tax cuts. However, in the subsequent two years revenue loss will reach nearly $650 million a year. That is equivalent to providing a seat in a pre-kindergarten classroom to every 4-year-old in the state who is at risk of being unprepared for grade school, placing nearly 8,000 teachers and teacher assistants in classrooms, doubling funding for textbooks and instructional supplies and doubling funding for need-based college financial aid.

If lawmakers really want to fix the flaws in their tax legislation, here are three things they should do:

• Restore tax provisions that help working families earning low wages support their families. The state Earned Income Tax Credits, which will expire at the end of the year, reached more than 900,000 taxpayers in North Carolina. This small state investment provided a temporary and modest support to families that are working. With this policy restored and strengthened, policymakers could pursue expansion of the sales tax to more services, bringing the tax system up to date while minimizing the tax increase for middle-class and low-income taxpayers.

• Stop the income tax rate cuts. They will ultimately cost more than $2.3 billion in revenue we desperately need for schools, health care, public safety and other services. Additional revenue from changes to the sales tax and the elimination of a handful of tax breaks will not be nearly enough to make up for that. Moreover, because the rate cuts also ended the practice of applying a higher rate as a taxpayer’s income grew, the vast majority of the tax cut goes to the top-earning households.

• Make sure all corporations are paying their fair share to level the playing field for North Carolina businesses. Right now, fewer than 10 percent of all businesses in the state are subject to the corporate income tax and only about 3 percent actually pay it at the current rate.

The $217 million corporate income tax cut lawmakers approved this year will go to a handful of profitable corporations. Meanwhile, there are a host of ineffective and poorly targeted tax breaks and credits that not only diminish state resources but give some businesses a competitive advantage over others.

These proposals are just a first effort to fix the most significant problems with the misguided tax overhaul lawmakers recently passed. More work will certainly be needed to modernize the state’s tax code for today’s economy and make sure it is working for all North Carolinians.