Prosperity Watch Issue 36, No. 3: Tax Shift Harms Working Families, Ability to Invest for a Strong Economy

Despite evidence showing no clear relationship between tax cuts and positive state-level economic performance, North Carolina lawmakers paid for tax cuts that will largely benefit the wealthy and profitable corporations by shifting the tax load onto middle- and low-income taxpayers, making the state’s already upside-down tax system worse.

North Carolina’s new tax code results in taxpayers at the lowest end of the income spectrum, with income of $17,000 or less, paying around 9.5 percent of their annual income in total state and local taxes while taxpayers at the upper end, with income of $345,000 or more, pay about 5.5 percent of their annual income in total state and local taxes (See Figure 1).

Shifting the tax load to middle- and low-income taxpayers is unlikely to spur economic growth and will further challenge the tax system’s ability to adequately fund essential public services in the years ahead. Asking taxpayers whose incomes have stagnated – and more recently declined – to carry a heavier tax load than wealthier taxpayers who have captured the majority of income growth in the past decade compromises revenue availability and dampens consumer spending.

Middle- and low-income taxpayers readily spend most of their income and increasing their tax load reduces their capacity to spend. A key aspect of promoting and strengthening the current economic recovery is boosting and maintaining demand for goods and services in the economy. Middle- and low-income taxpayers are the engine of the consumer demand needed to catalyze job growth. Proponents of the tax cuts suggest that high tax rates on wealthy taxpayers thwart the work efforts and investments that spur economic growth. However, evidence shows that the greatest positive impact on work participation, for example, occurs when tax rates are reduced for low-income workers and secondary wage earners, not the wealthy. Moreover, consensus does not exist among economists regarding the claim that tax cuts generate the increased savings, investment or expansion of employment opportunities necessary to deliver improved economic growth.

Self-inflicted budget crises and tax shifting often go hand in hand largely because the base broadening needed to pay for tax cuts is difficult to achieve through the policy process. Consequently, revenues are immediately lower than what they would have been had measures been taken to fully pay for tax cuts. North Carolina tax system’s heavier reliance on revenue from taxpayers whose incomes have stagnated or fallen will further challenge its ability to raise the revenue needed to keep up with the economy as it grows over time. This, in turn, challenges the ability to invest in educating children, retraining workers, and quality infrastructure – which have all been shown to deliver strong support to state economic growth.

The tax shift in North Carolina undermines the ability of working families to make ends meet and result in underinvestment in the economic development tools—educating our children, training our workforce and building out our infrastructure—most effective at supporting a strong recovery.
 

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