RALEIGH – With a signature by Governor Pat McCrory, the Tax Simplification and Reduction Act will be the first change to the tax code in about 80 years.
Wednesday, the House and Senate needed one more vote on the Tax Simplification and Reduction Act before it was sent to Governor McCrory for a signature. Last Monday, North Carolina’s legislature unveiled the act. On Tuesday, the House and Senate tentatively voted on the bill, with strong GOP approval and little liberal support.
When the tax code was written in 1930, North Carolina was based on a manufacturing economy, but as the state has progressed, it has evolved into a service economy. North Carolina only taxes about 30 services, which is low compared to most states.
North Carolina Senator Ellie Kinnaird says the tax code contains so many loopholes and exemptions that she compares it to Swiss cheese. She says she thinks that expanding the sales tax would be more effective than lowering corporate and individual income taxes.
“They should have, and they didn’t, completely rewrite the tax code to extend the sales tax to many, many services, but then lower the sales tax rate way down,” said Kinnaird. “That would’ve given us a more accurate reflection of revenue based on what our economy is than what they did instead. They decided to lower the other two taxes, that are the main sources of revenue, which is the individual income tax and the corporate income tax.”
The legislature removed the estate tax and Earned Income Tax Credit, which Senator Kinnaird says kept about half a million working poor from falling into a deeper financial struggle.
“Instead of doing tax reform, they’ve put us into a position where we have greatly disadvantaged the middle and lower classes to the advantage of people who are at the top,” said Kinnaird.
Instead of a three-tier personal income tax system, the legislature is instituting a flat tax of 5.8 percent by 2014. With the three-tier personal income tax system, the wealthier people pay a higher percentage than the middle and lower class. With the 5.8-percent flat tax, everyone will pay the same percentage, which Senator Kinnaird says will impact the lower and middle classes much more than the wealthy.
“Now, we’ve taken away the graduated income tax. We have a flat tax, which will be 5.8% and finally 5.75%,” said Kinnaird. “Well this means that the same rate is charged to a person making $30,000, $300,000, and $3,000,000. That’s just not fair.”
Also starting in 2014, tax-free holidays for back-to-school shopping and Energy Star appliances no longer exist. Senator Kinnaird says this change discourages the middle and lower classes from buying school supplies. Buying less items leads to less tax revenue, which she says hurts the economy overall.
The legislation raised the tax on mobile and manufactured homes by thirty percent, which Senator Kinnaird says also hurts the lower class that often lives in these homes.
She says small business will take a toll from the income tax hike, as well.
“Small businesses are the backbone of our economy; they drive our economy,” said Kinnaird. “300,000 businesses are now going to be taxed more. A small business owner pays taxes as though they were his individual tax, like his income, and that means that he’s going to have a huge tax bill because that’s not going to be changed.”
With the tax cuts, the government will raise 500 million less dollars, adding up to 2.5 billion dollars over the next five years. Republican legislature members are assuming that the business boom will fill the loss, but Senator Kinnaird says she thinks this will create a devastating hole in the economy.
“It’s not going to balance,” said Kinnaird. “The governor said he had to have a neutral, revenue neutral, which means that it doesn’t bring in anymore or lose anymore than the present system, but that isn’t what’s going to happen. We’re going to have a big hole.
Corporate tax rates are lowering to from the current 6.9 percent to five percent by 2014. Eventually, Senator Kinnaird says, the Republican representatives and senators are claiming that a reduction in taxes will encourage businesses to hire more people, relieving the high unemployment rate. Senator Kinnaird discredits this claim. She says small businesses cannot afford to hire any more employees under the tax reform, but larger corporations will continue to employ people, as normal.
“They’re counting on the economy,” said Kinnaird. “They call them the job creators, the wealthy are called the job creators. In 2008 when the Bush tax credit was started, they didn’t create new jobs. Here we are, no jobs created. When they talk about job creators, that’s just false. Unfortunately, all of the middle class and lower class people are going to pay for it.”
After the many tax cuts, Senator Kinnaird says the bill will unfairly benefit the wealthy, while hurting the lower class. She says the holes the tax reform creates in the economy cannot even out; and she compares it to a reverse Robin Hood, take from the working poor and give to the wealthy.