Tax Drama in the Tarheel State Probably Won’t End Well

The tax reform debate is heating up in North Carolina. Three competing plans have emerged from the House and Senate, and Governor McCrory has publicly endorsed what he considers to be the more “moderate” of the plans.  While there are certainly differences between the three plans, they all share in common the goal of moving away from reliance on the progressive personal income tax onto expanded, regressive consumption taxes.  This tax swap approach to tax reform has the inevitable and destructive impact of shifting tax responsibility away from the wealthiest households and onto low- and middle-income families.  ITEP analyses of the three plans has found that, on average, the bottom 80 percent of taxpayers will pay more as a share of income in taxes under all three approaches while the richest 5 percent will pay significantly less.  All three plans would also move the personal income tax away from a graduated rate structure to a flat rate, further eroding the progressivity of the state’s best tool for tax fairness.

Alexandra Sirota, the Director of the NC Budget and Tax Center, described the three plans this way when asked by the Raleigh News and Observer’s editors: “They all take different roads, but they get to the same place. We still have proposals that are more a tax shift than tax reform.”

Things are moving fast. This week, the House Finance Committee approved an amendment to the House tax plan (PDF) that would have added $500 million to the proposal’s cost as it provides a larger tax cut for wealthy households.  However, other House members refused to take up the proposal with the costly amendment and reached agreement to return to the original plan. On Thursday, the proposal was amended yet again (reinstating the cap on the mortgage interest deduction but now allowing taxpayers to claim unlimited amounts of charitable contributions) and sent to the House floor where it could be approved as early as tomorrow, setting up a showdown with the two Senate approaches.

The North Carolina Senate budget plan approved two weeks ago included significant revenue reductions (and corresponding spending cuts) to make room for tax reform which they agreed to take up through a separate process.  Senate President Phil Berger and Finance Chair Bob Rucho are championing the most extreme Senate plan, which would flatten the state’s income tax to 4.5 percent and make up part of the revenue loss with a comprehensive expansion of the sales tax, including adding food to the state sales tax base and taxing prescriptions drugs for the first time.  The other plan from the Senate is a so-called bipartisan effort to enact “revenue–neutral” tax reform, but as with the other two plans, the biggest winners under the bipartisan plan are profitable corporations and wealthy households. 

North Carolina is a state worth watching on the tax reform front.  Advocacy groups on the left and right (including Americans for Prosperity and Americans for Tax Reform) and special interest groups, like the real estate lobby, have spent hundreds of thousands of dollars to either promote, prevent or amend the three proposals.  And, for five straight weeks, a growing and diverse crowd of demonstrators have gathered at the General Assembly on “Moral Mondays” with calls to stop these tax giveaways to the rich as a major part of their message to lawmakers.

More from the News and Observer editorial:: “Republicans talk about making the tax code fairer – the Republican Senate bill is called the N.C. Fair Tax Act – but they can’t let go of the idea that if the rich were just taxed less everyone would prosper. That hasn’t worked and it won’t work. What’s needed isn’t an unburdening of the rich and the well-off. What’s needed is a cleaned-up tax code that distributes the tax burden fairly and progressively without special exemptions and loopholes. That’s simple, fair and right. What’s soon to come out of the tax mash up at the General Assembly is unlikely to be any of the three.”