Doubling Down on a Losing Strategy – More Income Tax Cuts Will Grow Budget Shortfalls, Not the Economy

April 2015

North Carolina policymakers have proposed another round of income tax cuts on top of those they passed in 2013. Senate Bill 526 would cost at least $1.4 billion by 2017, causing a new wave of cuts to services North Carolinians rely on each day and compounding the problems created by the tax cuts passed two years ago.

Rather than repeating the failed strategy of 2013 and further damaging the state of North Carolina, lawmakers should revisit the 2013 tax plan. The 2013 plan made significant changes to the state’s tax structure and shifted the tax responsibility to low- and middle-income taxpayers and away from wealthy individuals and profitable corporations. This new set of proposed income tax cuts would cause further harm to the state by reducing the availability of revenue to invest in the building blocks of a strong economy.

Senate Bill 526 would lower the personal income tax rate again and enact corporate tax changes that would further benefit profitable multi-state corporations. Key provisions of the proposal include the following:

Costly changes to the personal income tax

  • Reduces the personal income tax rate to 5.5 percent from its current 5.75 percent by 2017.
  • Replaces the existing standard deduction with a zero-percent tax bracket for non-itemizers. The amount of income included under the zero-percent tax bracket (up to $20,000 by 2017) would be higher than the existing standard deduction (up to $15,000).

Changes to the corporate income tax that benefit large multi-state corporations

  • Makes the reductions to the corporate income tax rate in the 2013 tax plan permanent. That plan made any cuts in corporate income tax rates beyond 2015 contingent on state revenue collections reaching a certain level. This bill would eliminate that contingency. Further corporate tax cuts would take place regardless of revenue performance.
  • Reduces the corporate income tax rate to 4 percent from the current 5 percent by 2017.
  • Excludes payroll and property from the formula for determining a corporation’s state income tax. Currently, North Carolina considers property, payroll (employees) and sales in determining the share of a corporation’s profits that is subject to tax. The proposed bill would only consider the sales of a corporation under a new formula known as a Single Sales Factor (SSF) apportionment formula. This tax change would favor corporations whose presence in the state is based more on personnel or property ownership than sales.
  • Cuts the corporate franchise tax rate by 10 percent by 2016. Corporations in North Carolina pay a franchise tax for the privilege of doing business in the state.

Neither the relevant research nor recent experiences in other states support the idea that tax cuts are a good strategy to achieve economic growth. In fact, tax cuts such as the ones included in this bill may lead to cuts in the very things that attract businesses and create jobs, such as a top-rated education system and safe roads and bridges. By focusing on providing tax cuts to corporations already doing well in today’s economy, the proposed legislation fails to address North Carolina’s immediate need for more good-paying jobs across the state.

This BTC Report provides an overview of the proposed legislation and highlights the immediate and long-term impact on the state’s finances, the likely economic impact and who benefits.

Note: This version has been corrected to reflect economic data for NC and the US.