What could be wrong with a constitutional amendment limiting income tax rates to 3.5%

The NC GOP platform (Article II) states, “The government should tax only to raise money for its essential functions. We support a thorough review of expenditures each year, and we support a tax payer’s bill of rights.” “TABOR” is the usual acronym for a “Taxpayer Bill of Rights.” A goal I share with proponents of SB1080 is a mechanism that will restrain state government from overspending.

Does SB1080 actually effectuate these principles? Does it expand taxpayer rights or constrict them? Why is it a constitutional amendment? 

Population changes increase both tax revenue and the need for service. A typical TABOR adjusts for increases based on population and inflation. It does not adjust for changes in the level of service.

This proposal seeks to remedy the spending problem by capping the state income tax rate at 3.5%. 

Currently, Article V of the North Carolina Constitution reads:

"Sec. 2.  State and local taxation. . .

                  (6)        Income tax.  The rate of tax on incomes shall not in any case exceed seven percent, and there shall be allowed personal exemptions and deductions so that only net incomes are taxed.”

Unlike the 2018 Amendment which reduced the cap from 10% to 7%, this one would lock in a future cap to a rate with which we have no experience. Since the personal income tax provides one half of the revenue for the general fund of the state, this is a risky bet. The proposal assumes that the decrease in the rate would bring in more revenue just as the increase in revenue occurred after the rate was decreased from 7.75% to 4.5%. This uses both economic and logical fallacies – the point of diminishing returns and post hoc ergo propter hoc.

For the last dozen years, the House has not agreed to this type of amendment. It has repeatedly been sent over by the Senate. The opportunity for legislative extortion will be immense. Unlike a veto override, a constitutional amendment requires 72 positive votes, not 3/5 of those voting. Any absences, vacancies or defections on the GOP side will increase the need for Democratic votes.

Why would Representatives and voters of 2026 think that they had superior knowledge of government policy to those Representatives and voters of 2031 or beyond? SB1080 makes no more sense than a liberal version that REQUIRED a minimum level of income taxation. 

Particular Problems with SB1080

SB1080 restricts increases only on income tax rates – not increases in overall state taxes – so it almost requires increases of other taxes. It is no surprise that the Senate plan is to reduce income taxes from 4% to 2.5% while adding to services subject to sales tax and adding sin taxes  (alcohol, gambling, tobacco, marijuana) to fill the gap! Would the Senate be willing to tax prostitution in the future? Why not? Some Senators want to eliminate the personal income tax altogether.

There is an inherent problem with squeezing income tax receipts into taxes on services.

A tax on services is an income tax on gross income. Suppose the “sales tax” was extended to the services of a CPA. What is a sales tax on a pure service but an income tax on gross income? A CPA could successfully refuse to pay the 6.75% “sales tax” claiming that it exceeded the 3.5% constitutional limit on taxation of income. The budget for that year would be in chaos. 

This Amendment only restricts the rate of tax. A future Assembly that clearly needed more revenue could solve the problem by decreasing personal exemptions or by eliminating popular deductions. Would that be good policy? NO.

 SB1080 would encourage more borrowing. Receipts from a bond would not count against the income tax limitation and the resulting spending could be counted over decades rather than the years the money is spent. 

SB1080 would likely have a negative effect on our AAA bond rating. Bond ratings themselves are just that – opinions. And bond ratings (opinions) matter  – a lot. If we lose our AAA rating the cost of borrowing increases. Bond rating agencies do not like tax limitations that apply to the future.

I did not oppose the 2018 Constitutional Amendment setting the cap at 7%. By then we had already shown that tax rates below that figure were prudent and actually made North Carolina much more competitive. This proposal needs a lot of work. I could suggest several changes that could make this proposal workable.

Skip Stam served eight terms in the North Carolina House and was, at various times, House Republican Leader, House Majority Leader and Speaker Pro Tem.