North Carolina’s big ‘tax swap’ is coming up short

By Alexandra Forter Sirota - N.C. Justice Center

Tax Day 2016 is upon us and it’s clearer than ever that North Carolina’s recently re-formulated tax code is failing to fulfill its purpose of ensuring that every community can thrive. Rather than collecting the badly needed revenue to meet the growing—and changing—needs in communities across the state, policymakers instead chose to shift the tax load onto everyday North Carolinians and reduce available dollars for educating every child, stewarding our natural resources and jumpstarting economic development.

These choices have impacts today and long-term implications for future generations of Tar Heels.

As is documented in a new report by my colleague Cedric Johnson (“North Carolina’s ‘tax swap’ gives biggest breaks to the wealthiest, undermines public investments for all”), the deliberate tax swap began in 2013 and gained momentum in 2015 with two actions by the General Assembly. First, lawmakers cut state income tax rates –primarily benefitting wealthy taxpayers and profitable corporations – and then increased the number of goods and services subject to sales tax.

This greater reliance on revenue from the sales tax – paired with a diminished role for income taxes – shifts the tax load on to those who can least afford it. Since 2013, the tax load on the lowest income taxpayers increased on average by $30 while the top one percent of income earners in the state received an average tax cut of around $15,000. Not only is this a problematic approach to tax policy because it relies on a greater share of the income of those who struggle to make ends meet each month, but it also fails to account for where incomes are growing in the current economy: at the top.

Sure, expanding the range of purchases on which the sales tax is levied is not inherently bad policy. But such a move should be accompanied by a state Earned Income Tax Credit, the best tool to ensure that policymakers are not asking more from everyday working North Carolinians than they do from the state’s wealthiest residents (which is what happens now). Unfortunately, North Carolina ended its state EITC last year, becoming the only state to eliminate the credit in nearly three decades and disregarding the consistent bipartisan support for the policy.

The loss of the EITC hit North Carolina’s working families hard and rural communities even harder. Nearly one million North Carolina taxpayers claimed this tax credit. In many rural communities, nearly 40% of tax filers received this tax credit. At a time when wages continue to fall for low- and middle-income workers, it is critical to reward work and make sure that working families have the financial resources to support their children’s healthy development and buy the basics in their local communities.

Even as the tax swap has delivered big tax breaks to the wealthy and increased the tax load for everyone else, it also reduced resources available for public investments that build a strong economy.

As tax dollars went back into millionaires’ bank accounts, those funds were unavailable for maintaining classrooms, keeping and attracting teachers, and modernizing technology in public schools. These dollars could no longer make sure that higher education remained affordable or that workforce training could adapt to the needed skills for the jobs of the future. These dollars could not be invested to attract private investors, or support local entrepreneurs as they seek to fuel revitalization in neighborhoods and rural main streets across North Carolina.

This Tax Day it is not only critical to reflect on how we can collaborate to build healthy communities that promote opportunity. We must also recognize that the decisions made in Raleigh are making it more and more difficult to promote and support thriving communities.

Sadly, however, our policymakers’ seemingly insatiable appetite for income tax cuts for the wealthy and profitable corporations are undermining the widely shared vision that economic opportunity and prosperity should not bypass rural communities, but rather include everyone and every community of the Tar Heel state.

As lawmakers return to Raleigh next week for the 2016 legislative session, let’s hope they and Governor McCrory rethink their commitment to this failed recipe.

Alexandra Forter Sirota is the Director of the North Carolina Budget and Tax Center.

By Alexandra Forter Sirota

N.C. Justice Center

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