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ANALYSIS FROM THE BUDGET & TAX CENTER
VOLUME 19 NUMBER 3
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I June 2013
GAMBLING AWAY OUR FUTURE:
New Senate Tax Plan risks North Carolina’s long-term growth
to give tax cuts to the wealthy and profitable corporations
B Y A L E X A N D R A F O RT E R S I R O TA , D I R E C TO R
THIS WEEK THE SENATE INTRODUCED ANOTHER TAX PROPOSAL.
The new proposal, like all the others, is about massive tax cuts for the wealthy and
profitable corporations, not tax reform (See Figure 1).1 The Senate plan would cost
more than $1 billion in annual revenue upon full implementation. This means more cuts
to core public investments such as education, public safety, and other services that
children, seniors, families, businesses, and our economy need.
Media Contact:
ALEXANDRA FORTER
SIROTA
In the short-term, the tax cuts will create an ongoing revenue crisis, where year-afteryear lawmakers must focus on what services to cut to bring the budget into balance.
Middle class and low-income North Carolinians will be hard hit by the likely combination
of a weakened foundation for economic growth and increased sales and property
taxes. In the long-term, such cuts will jeopardize the state’s economic competitiveness
and the fiscal stability of local communities.
919/861-1468
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FIGURE 1:
Budget & Tax Center
Share of Net Tax Cut
a project of the
north carolina
0.6%
JUSTICE CENTER
0.5%
P.O. Box 28068
Raleigh, NC
27611-8068
www.ncjustice.org
Three-quarters of the net tax cut goes to the top
5 percent of taxpayers
0.4%
0.3%
0.2%
0.1%
0%
Less than
$19,000
$19,000$32,000
$32,000$52,000
$52,000$84,000
$84,000$169,000
$169,000$393,000
$393,000
or more
SOURCE: Special Data Request of Institute on Taxation and Economic Policy, June 12, 2013.
B U D G E T & TA X C E N T E R
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The Senate Plan
is About Tax Cuts
for the Wealthy,
Not Tax Reform
eal state tax reform would ensure that the state could maintain its most important
investments--high quality schools, a top-notch system of colleges and universities, upto-date infrastructure, and pristine natural beauty. And real tax reform would make fairness
a priority so the tax system, overall, doesn’t ask more of low- and middle-income households
than high income households.1
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The Senate Plan roundly rejects these principles of tax reform and instead reduces state
revenues that pay for key services in order to give tax cuts to the wealthy and profitable
corporations. When fully implemented, the plan will reduce revenues by $1.3 billion each
year, leaving our system inadequate to fund public schools, health care and many of the
public services, all of which we are already funding below pre-recession levels.2 This plan
means that in five years, when there are more children to educate, more high schoolers
heading to college, and more seniors in need of care, we will have little more than we do
today to pay for services, after adjusting for inflation.
Second, by failing to address the already upside down nature of North Carolina’s tax system,
the new proposal would continue to ask more from those with the least amount of income
while the wealthiest pay far less as a share of their income.3 By delivering the largest share
of the tax cut to the top, the Senate tax plan makes worse the inequities in North Carolina’s
tax system (See Figure 2).
In fact, adopting a flat tax rate results in a huge tax cut for wealthy individuals. In this tax
plan, 28 percent of the total income tax cut resulting from adopting a flat tax goes to the
wealthiest 1 percent who have incomes of $940,000 on average.4
As a result of all the income tax changes, the wealthiest 1 percent would receive a total
income tax cut, on average, of $12,582. At the same time, on average, the poorest 20
percent would receive a total income tax cut of $47.
The Senate plan does not address the upside-down tax system,
provides wealthy a big tax cut
FIGURE 2:
Taxes as a Share of Income
10.0%
9.0%
8.0%
7.0%
6.0%
5.0%
n Current
4.0%
n Senate Plan
3.0%
2.0%
1.0%
–
Lowest 20% Second 20% Middle 20%
Fourth 20%
Next 15%
SOURCE: Special Data Request of Institute on Taxation and Economic Policy. June 12, 2013.
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B U D G E T & TA X C E N T E R
Next 4%
TOP 1%
Local Food Tax Likely
to be Maintained, Makes
Worse Distributional Impact
of Tax System
BOX 1:
Sales Tax
Expansions Are
Exported, Fail to
Fix Problems with
Sales Tax
he sales tax expansions under the
Senate tax plan are driven primarily by a
cap on sales tax refunds to non-profits and a
change in the way electricity is taxed.
Additional smaller-dollar changes close
exemptions that have been provided to
specific industries or end sales tax holidays,
for example. Importantly, too, the Senate
plan expands the sales tax base to some
business inputs, a policy that has been
recognized to lead to negative impacts on
the economy.5
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Among the major talking points on the
Senate tax plan is that it repeals the
local sales tax on food. Importantly
though it provides a locality with the
authority to raise the sales tax on food
at any point after holding an advisory
referendum.
Due to the way in which the sales tax base is
expanded, more than 40 percent of the sales
tax changes are exported either to
businesses and non-profits or out-of-state
residents.6 Under the plan, however, 66
percent of the total sales tax increase is
borne by in-state residents in the bottom 80
percent of the income distribution. And
because the Senate tax plan takes the
unusual step of eliminating the local food
tax, the impact on residents may be further
muted (See Box 1).
Given the estimated revenue loss for
local governments overall from this
plan, it is likely that many local
governments will need to raise
revenue either through the local sales
tax option or property taxes. Without
the repeal of the food tax, the Senate
plan looks much worse from a
distributional perspective.
The existing sales tax, which is maintained
under the Senate plan at the same rate,
continues to represent the greatest share of incomes for low- and middle-income
households. That is because these households spend more of their annual income on goods
that are subject to sales tax.7
Maintaining the tax on food at the local level changes
the distributional impact of the plan
FIGURE 3:
Average Tax Change by Income Group
+2,000
$25
–
-$9
-$12
-$20
-$257
-2,000
-$1,800
-4,000
-6,000
-8,000
-10,000
-12,000
-14,000
-$13,795
-16,000
Less than
$19,000
$19,000$32,000
$32,000$52,000
$52,000$84,000
$84,000$169,000
$169,000$393,000
$393,000
or more
SOURCE: Special Data Request to Institute on Taxation and Economic Policy, June 11, 2013
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Senate tax proposal would reduce revenues year after year
FIGURE 4:
Annual Revenue Loss Under 3% Growth in millions ($)
$1,000
2,000
3,000
4,000
5,000
6,000
7,000
8,000
9,000
1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
SOURCE: NC Department of Revenue, total unadjusted revenue collections 1992 to 2012 with projections.
Revenue losses
likely to grow
over time
he revenue losses from this tax plan will total $4.4 billion over the next five years. When fully
implemented, it is projected that the plan will result in more than $1 billion less each year to
fund critical public services, an amount roughly equivalent to our community college system.8
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In addition, the shift to a flat income tax means that revenues won’t grow fast enough over time
to keep up with North Carolina’s needs in a 21st century economy.9 At a time of high and rising
inequality, a flat income tax is an outdated and inadequate source of revenue for schools and
other services. Senator Berger has even stated that this plan would hold revenue to a constant
growth rate of 3 percent. Had North Carolina been held to that rate of revenue growth over the
past 20 years, the result would have been devastating and our state would not be the same
jewel of the South that it is now.
In 2007 and 2008, for instance, North Carolina would have had nearly $8 billion less for North
Carolina’s schools, colleges and universities, roads, public safety, and other services (See
Figure 4). That $8 billion is more than our combined budget for the Department of Health and
Human Services, Department of Commerce, Department of Justice, Indigent Defense Services
PLUS funds to address the NC pre-K waiting list and the child care subsidy waiting list.10 Even
this year, revenues would have been $6 billion less.
Moving forward with the Senate tax plan will leave North Carolina unable to maintain its most
important investments, which are the very building blocks of a strong economy and strong future.11
Tax cuts to big,
profitable
corporations
will not spur
job growth
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he Senate plan ultimately eliminates the corporate income tax—that means that
profitable corporations will no longer be asked to help pay for many of the investments
that help them thrive, like education and quality transportation and infrastructure.12
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Despite proponents claims, eliminating the state corporate income tax is unlikely to lead
businesses to create more jobs or expand their operations. The reality is that state corporate
income taxes represent a very small amount of total business costs—typically 2 percent--and
B U D G E T & TA X C E N T E R
BOX 2:
Economic Incidence Analysis Critical to Assessing Who Pays
An economic incidence model, like
the one used to model the Senate
plan here, provides population level
estimates of the impact of the final
incidence of tax changes on
taxpayers by income group. It is
built from actual taxpayer data from
a statistically valid sample of realworld taxpayers making the results
reflective of what will happen to the
broader tax-paying population.13
This type of model is used by the
U.S. Treasury Department, the
Congressional Joint Committee on
Taxation and the non-partisan
Congressional Budget Office and
recognized as the best way to
model population level impacts of
tax changes.14
While on average all income groups
receive an overall tax cut, that
doesn’t mean that every single
taxpayer would. From the economic
incidence model, roughly 22
percent of all taxpayers will have an
income tax increase as a result of
the plan. Representative or sample
taxpayer analyses, like the kind that
Fiscal Research has used to
present taxpayer impacts from the
bill, provide select examples of the
SAMPLE TAXPAYER ANALYSIS
individual level impacts of the tax
plan.
Here are some other differences
between these methods:
ECONOMIC INCIDENCE ANALYSIS
Uses hypothetical taxpayers.
Results cannot be generalized to
other taxpayers.
Uses actual tax return data from a
statistically valid sample of realworld taxpayers. Results are
reflective of what will happen to
the broader tax-paying population.
Looks at the potential impact on
hypothetical taxpayers at a few
specific income levels.
Uses statistical methods to see
how tax proposals will impact an
income group, on average. Income
groupings are based on the
incomes of real North Carolinians.
Looks at who is first charged the
tax and uses an estimated average
to assess the impact of changes.
For example, it uses the average
sales tax change, and applies that
to its hypothetical taxpayer.
Looks at who ends up paying the
tax. For example, it takes into
account that businesses often
pass sales tax on to consumers,
and uses data on how consumers
spend their money to estimate the
impact of the sales tax changes
on actual taxpayers.
don’t much affect corporations’ bottom lines. In addition, much of the corporate income tax
cut would go to shareholders who live out of state.15 Fully 90 percent of the corporate income
tax cut will be exported.16
Conclusion
he Senate tax plan is nothing more than massive tax cuts for the wealthy and profitable
corporations that come at the expense of everyone else. The implementation of this plan
would fail to deliver its promised return of jobs and improved economic outcomes and
instead undermine the foundations of our state’s economic growth and future prosperity.
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1
Analysis is based on the Proposed Committee Substitute that was voted on June 13, 2013 on the Senate floor. Unless
noted in the text, this analysis reflects the plan assuming no local food tax.
2
McLenaghan, Edwin and Alexandra Sirota, 2011. The Future is Now: A Plan to Modernize North Carolina's Revenue
System. Budget & Tax Center Report: NC Justice Center, Raleigh, NC.
3
NC Fiscal Research Division, Fiscal Note on House Bill 998 Fourth Edition, accessed at:
http://www.ncga.state.nc.us/Sessions/2013/FiscalNotes/House/PDF/HFN0998v4.pdf.
4
Institute on Taxation and Economic Policy, 2013. Who Pays? A Distributional Analysis of the Tax Systems in All 50
States.
5
Sirota, Alexandra and Brenna Burch, September 27, 2012. Improving the Sales Tax: A critical Step to a Modern
Revenue System. Budget & Tax Center Report: NC Justice Center, Raleigh, NC.
6
Special Data Request from the Institute on Taxation and Economic Policy, June 13, 2013. Analysis assumes that the
state EITC is no longer in current law and that the local food tax will be eliminated unless otherwise noted.
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7
Sirota, Alexandra and Brenna Burch, September 27, 2012. Improving the Sales Tax: A Critical Step to a Modern
Revenue System. Budget and Tax Center Report: NC Justice Center, Raleigh, NC.
8
NC Fiscal Research Division, Fiscal Note on House Bill 998 Fourth Edition, accessed at:
http://www.ncga.state.nc.us/Sessions/2013/FiscalNotes/House/PDF/HFN0998v4.pdf
9
Sirota, Alexandra, April 2012. The Case for North Carolina's Personal Income Tax. Budget & Tax Center Report: NC
Justice Center, Raleigh, NC.
10 Author’s analysis of Base Budget FY 2013-2014.
11 Leachman, Michael, Michael Mazerov, Vincent Palacios and Chris Mai, March 2013. Cuts in Personal Income Taxes: A
Poor Strategy for Economic Growth. Center on Budget and Policy Priorities: Washington, DC.
12 Johnson, Cedric and Alexandra Forter Sirota, April 2013. Cutting Corporate Income Taxes Won't be an Economic Boon
for North Carolina. Budget & Tax Center Brief: NC Justice Center, Raleigh, NC.
13 Mazerov, Michael, January 15, 2002. Developing the Capacity to Analyze the Distributional Impact of State and Local
Taxes: Issues and Options for States. Center on Budget and Policy Priorities: Washington, DC.
14 Institute on Taxation and Economic Policy, Frequently Asked Questions, accessed at:
http://www.itep.org/about/itep_tax_model_simple.php
15 Gravelle, Jennifer C., May 20, 2010. Corporate Tax Incidence: Review of General Equilibrium Estimates and Analysis:
Congressional Budget Office, Working Paper 2010-03.
16 Gravelle, Jane G. and Kent A. Smetters. 2006. “Does the Open Economy Assumption Really Mean That Labor Bears
the Burden of a Capital Income Tax.” Advances in Economic Analysis & Policy vol. 6:1 and ITEP Microsimulation
Model.
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APPENDIX:
Table of Full Results on the Impact of the Senate Version of House Bill 998
B U D G E T & TA X C E N T E R
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P.O. Box 28068 n Raleigh, NC 27611-8068
919/856-2176 n [email protected]
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