Amendment seeks to cap income tax rate
By Jon Hawley
Sunday, July 8, 2018
Should North Carolinians be constitutionally protected against higher income tax rates?
Area Republican lawmakers say yes, while an area Democratic lawmaker says locking in a lower tax rate will make it harder for the state to meet its future obligations, particularly in education.
Over nearly unanimous Democratic opposition, including from state Rep. Howard Hunter of Hertford County, Republican lawmakers last week passed Senate Bill 75, an act that asks state voters to cap the state's income tax rate at 7 percent.
Currently the state’s income tax cap is set at 10 percent. That threshold was set by a constitutional amendment passed in 1935, according to the Legislative Analysis Division.
Current corporate and personal income tax rates are less than 7 percent, meaning the amendment, should voters approve it this fall, wouldn't cut taxes; nor would it deprive the state of expected revenue.
That might make the amendment seem moot, but Republicans argue it's needed to ensure tax rates remain reasonable for citizens and attractive to business investment.
Democrats counter that the amendment will tie the state's hands if and when it needs more revenue for vital services, such as education.
The current tax rates are 5.499 percent for personal income and 3 percent for corporate income — rates projected to raise $5.89 billion in 2017-18, according to memos from the Legislative Analysis and Fiscal Research divisions. Legislative Analysis also notes those rates are projected to drop to 5.25 and 2.5 percent, respectively, on Jan. 1, 2019.
That means that lowering the cap on income taxes to 7 percent could put millions — or even billions — of dollars' worth of revenue out of lawmakers' reach. It would also limit the state's ability to reinstate income tax brackets, as existed prior to 2014 with Democratic support. More than a decade ago, the state taxed the highest incomes at 8.25 percent, according to Legislative Analysis. The state could not return to that level under the new cap.
Further capping the income tax rate is needed so the state won’t return to failed “tax-and-spend” policies of the past, state Rep. Bob Steinburg, R-Chowan, said Thursday.
“The (Republican) majority feels excessively high rates are not helpful to the economy,” he said.
He claimed that Republicans' approach to taxation and spending, including income tax cuts, have helped turn the state around. The economy's growing, revenues are up, and the state has more than $2 billion in reserves, he said.
Notably, in the years prior to Republicans taking control of the General Assembly in 2011, Democrats wrestled with major revenue shortfalls due to the national recession.
State Sen. Bill Cook, R-Beaufort, who also voted to put the income tax-cap amendment referendum on the ballot, also described it as a way to preserve the gains made possible by Republicans’ changes to tax policy.
“Since assuming leadership of the General Assembly in 2011, we have overhauled the state’s tax code, lowering rates and eliminating dozens of loopholes – resulting in the vast majority of North Carolinians keeping more of their own tax dollars,” he said in an email. “The changes have also helped create hundreds of thousands of new jobs and consecutive budget surpluses.”
If the referendum passes, Cook said, “It will help ensure the state does not reverse course on those reforms and return to burdening North Carolinians with some of the highest taxes in the Southeast.”
Steinburg noted the constitutional amendment, if it passes, still allows the state to collect more revenues in various ways. As first proposed, the amendment would have capped the income tax rate at 5.5 percent, or roughly the current rate for personal income taxes, he said.
Additionally, the amendment applies to income tax rates while continuing to allow exemptions and deductions. Those tax breaks could mean people owe little to no taxes, despite their nominal rates.
The amendment also has no effect on sales tax rates, nor on the state's authority to levy various fees.
Steinburg described the constitutional amendment as a compromise that locks in attractive, low tax rates. Republican lawmakers have long wanted to eliminate state income taxes entirely, but Steinburg supports reducing them gradually to ensure the state doesn't suddenly face revenue shortfalls.
Hunter, who currently represents part of Pasquotank County but will represent all of it if he’s re-elected this fall, strongly opposes the amendment. Contrary to Republicans' claims, he says the bill will make it harder to fund public schools. Democrats and progressive groups say that adjusted for inflation, North Carolina is still not spending as much on schools as it did before the recession.
Passing the amendment will “make it more likely that property taxes, sales taxes, and fees go up (which working people pay more of) and income taxes will go down (that wealthy people pay more of),” Hunter said in an email.