Photo by Angie Newsome
CHAPEL HILL – Wednesday afternoon, the North Carolina State Legislature approved the Tax Simplification and Reduction Act, sending it to Governor Pat McCrory for approval.
The bill reduces corporate income tax and replaces the progressive three-tier personal income tax system with a flat 5.8-percent tax for North Carolina residents.
By cutting the corporate tax, the Republican legislature believes that businesses will hire more employees, stimulating economic growth.
House Representative Verla Insko says she does not support this claim. Insko references the Congressional Budget office’s 2012 study that reviewed 65 years of data on job creation. She says the research did not show any proof that cutting taxes for the wealthy creates jobs.
“What attracts employers to North Carolina is a really strong infrastructure,” says Insko. “All the evidence indicates that those things come before even tax incentives. Because we’ve cut the budget in the last several years, money for our other infrastructure is being leveled off. You have to make investments in your infrastructure in order to plan for the future. In my judgment, we’re really going in the wrong direction.”
Infrastructure employers are seeking includes roads, broadband, access to research universities, good public schools, and an educated work force. Insko says without these features, North Carolina will be far less appealing to businesses.
The national unemployment rate is 7.6-percent. North Carolina’s unemployment rate lies a full point above that. Insko says North Carolina has already cut a lot of teachers and state employees, adding to the high unemployment rate.
The corporate tax rate will decrease from its current 6.9-percent to 5-percent by 2015, and possibly to 3-percent in 2017. Insko says many corporations find loopholes and tax exemptions to avoid paying taxes. Only the highest corporations pay taxes, and they make up only 6-percent of the budget.
She says the personal income tax will have the most impact on North Carolina residents.
“Over a period of five years, it’ll actually take out 2.5 billion dollars out of our revenue stream,” says Insko. “Our Medicaid budget is growing every year. Our education budget grows every year. There are just no more places to cut without really impacting the services that we provide for people.”
Few states had a progressive, three-tier personal income tax similar to North Carolina’s. Insko says the Republican legislature is looking to the American Legislative Exchange Council, which favors a flat tax, for direction.
Small businesses pay their taxes as personal income taxes, so they will face tax increases. Previously on the first $50,000 a small business made, the business owner would not have to pay taxes. With the passing of this bill, taxes will be imposed upon that initial revenue.
“A lot of our small businesses struggle,” says Inkso. “When the economy’s like this, people cut back on their purchases. It affects a lot of our small businesses. That $50,000 tax credit was really essential in keeping our small businesses going; that’s going to go away. A lot of our small businesses are going to be getting a significant tax increase.”
The bill also takes away a deduction on retirement income. Therefore, seniors will have three to four thousand dollars less annually for expenses.
Due to the expected decrease in tax revenues, budget writers are reevaluating the budget and making further cuts, including a small raise for state employees.
“If it happens that the economy grows, then a growing economy will pour new revenue into the revenue department,” says Insko. “But that’s not going to happen this year. This bill was not revenue neutral. There have been proposed budgets coming through and now we have a tax bill that’s passed. We have a better estimate of how much revenue is going to come in next year. It is below the estimate that the current budget was built on.”
Insko says budget writers are having difficulty reworking the budget. At the earliest, she says she’s is expecting to receive the budget by late next week.
The legislature justifies the bill as a tax cut, but Insko says it will give the middle class less buying power, pushing it into the lower class. She says the gap between the wealthy and the poor is widening.
“To have a tax cut at all, would be for people who make more than $230,000 a year,” says Insko. “If you look historically over what’s happened to our middle income and lower income working families, they’ve lost buying power over the last forty years. That’s a trend that’s continuing. The great American consumer drives our economy. I think that’s one thing that’s kept our economy stagnant is that people just don’t have any extra money.”
The need to rewrite the tax code came from North Carolina moving from a manufacturing to a service economy. When the tax code was written in the 1930s, people bought mostly products. Now, North Carolinians are consuming more services, says Insko. Across the nation, three to four hundred services are taxed, but in North Carolina, only around thirty receive a tax. Therefore, Insko says expanding the sales tax seemes like a necessary measure.
If the Tax Simplification and Reduction Act had not passed, Insko says there would be more benefits for North Carolina.
“I hoped that it wouldn’t pass,” says Insko. “If this bill had failed, we would have more revenue coming in. State employees would’ve maybe gotten a raise this year.”
Overall, Insko says more people will face an increase in taxes and decrease in buying power, depressing the North Carolina economy.