North Carolina Republicans have been on a mission over the last few years to remove every shred of progressivity from their state’s income tax. They’ve largely succeeded, passing several rounds of tax cuts since 2013 that, among other changes, turned the income tax from one with a progressive structure into a flat tax.
So now it’s time for the coup de grace: An amendment enshrining those tax breaks for the state’s wealthiest residents into the state constitution.
In November, North Carolina residents will be voting on a ballot initiative that would amend the state’s constitution to cap its income tax at 7 percent, down from a current cap of 10 percent. Considering that North Carolina’s income tax currently tops out at 5.499 percent, and is scheduled to fall further to 5.25 percent next year, that may not seem like a big deal. But it is.
First, the background. The change to a flat tax helped those at the top of the income scale, who saw their rates drop the most. Along with a host of other tax cutting measures, including a corporate income tax reduction, it cost the state a big chunk of money.
“Since 2012, when Republicans took full control of the legislature and governorship for the first time in modern history, they’ve been on a tax cutting rampage,” said Meg Wiehe, a North Carolina native and deputy director of the Institute on Taxation and Economic Policy. “The state will be about $3.6 billion shorter in revenue than it would have been otherwise, which is a pretty significant difference in a state with a general fund of just around $21 billion.”
By pushing a cap on the income tax into the Constitution, lawmakers hope to lock those reductions in, making future legislators go through the same long amendment process in order to raise taxes or add progressivity back into the code. (Amendments to the North Carolina constitution are placed on the ballot via a three-fifths vote of both houses in the state legislature and require approval by voters, whereas legislation can be passed by a simple majority of lawmakers.)
As recently as 2013, the top income tax rate in North Carolina was 7.75 percent, so it’s not out of the question that lawmakers would want to implement an increase from today’s levels. Even setting the cap at 7 percent was a compromise of sorts among the Tar Heel State’s Republicans: Many wanted to cap the income tax at its current level, or even below that, forcing a constitutionally-mandated tax reduction.
A cap poses several problems, in addition to the simple unfairness of leaving such a low tax rate on the wealthy in a state where more than 100 percent of the income gains since 2009 have gone to the richest 1 percent of the population (meaning those at the other end of the income spectrum actually lost ground). For starters, it could undermine important state investments, as Alexandra Forter Sirota, director at the North Carolina Justice Center’s Budget and Tax Center, explained.
“To maintain current service levels for our population, we won’t have enough revenue under our tax code in 2019,” she said. “So they’ll have to either cut services or raise revenue or some combination of both.” And those cuts tend to fall disproportionately on low-income communities and people of color, she said, as will potential revenue raisers if the state has to resort to fees or sales taxes in lieu of being able to raise income taxes.
Already, that dynamic has been evident in the state. As the Center on Budget and Policy Priorities noted recently, spending on public colleges in North Carolina is still nearly 20 percent below where it was before the 2008 recession. Previous rounds of tax cutting have made it so that North Carolina can’t raise K-12 education funding, which is already among the lowest in the nation.
This problem will be magnified when another economic downturn inevitably comes. “There have been key times even in recent history when the state, in an emergency situation, has relied on the wealthiest taxpayers to pay more to help ensure that critical services don’t have to be deeply cut,” explained Wiehe. “Future lawmakers who maybe would prefer to use the income tax as their tool wouldn’t have that available to them.”
Case in point, the state enacted a temporary top tax rate of 8.25 percent on the state’s richest residents in response to the Great Recession – helping to preserve funding for public schools and public health programs like the Children’s Health Insurance Program – a move which would be rendered much more difficult if lawmakers needed to spend time getting voters to approve a new amendment.
North Carolina has been a political battleground in recent years, the quintessential “purple” state that is home to the weekly Moral Mondays march, but with a state legislature controlled by conservatives. In addition to the tax cap, voters there will be assessing amendments that would restrict voting rights and remove some of the (currently Democratic) governor’s powers. Locking in tax cuts for the wealthy fits right in.
According to a recent Elon University poll, 56 percent of North Carolinians support the tax cap amendment as written, with 15 percent opposing it. However, after being provided an explanation that includes the amendment’s possible adverse effects, the gap falls to 45-27. That has Sirota optimistic that voters grasp what’s at stake.
“I think that North Carolinians are incredibly smart about this issue right now,” said Sirota. “They understand that since 2013 the vast majority have not seen a big difference in their taxes, but they have seen their communities struggle with having to figure out how to meet needs.”