Final Tax Plan Falls Far Short of True Tax Reform

The tax plan recently signed into law by Governor Pat McCrory fails to make the fundamental changes North Carolina needs to create a modern, adequate and fair revenue system that can boost the state’s economy and strengthen schools, health care and other services families need to prosper and the economy needs to grow. The plan consists largely of cutting tax rates for personal and corporate income, in a way that will overwhelmingly benefit the wealthy, and does little to rid the tax code of costly tax loopholes (see details of the plan below). The result will be a significant loss of revenue and a greater reliance on the sales tax, which hits middle-class and low-income taxpayers the hardest. Further cuts to public education, health care and public safety are sure to follow, which will come on top of years of cuts to these vital services during and after the Great Recession.

The plan falls short on several key principles of tax reform:

• Fairness: It fails to ensure that state taxes are based on ability to pay, and actually shifts the tax load further to middle-class and low-income taxpayers as a result of changes such as allowing the state Earned Income Tax Credit and dependent care credit to expire, while expanding the sales tax to more goods and services. Wealthy individuals and profitable corporations get huge tax cuts under the plan.
• Adequacy: The tax plan reduces the amount of revenue available for public investments by $650 million annually. As a result, further cuts are likely to be made to public schools, higher education, health care, public safety, transportation and other public services in the years ahead. These are the very services that create a strong foundation for a growing economy, by fostering a skilled, highly educated workforce; ensuring companies can get their goods to markets; and making communities and businesses secure.
• Simplicity: The tax plan fails to meaningfully reduce the number, and dollar amount, of tax loopholes. These preferential tax provisions will continue to reduce the amount of revenue raised each year, even though many of them may fail to serve a useful purpose.

The problems with the state’s existing tax system are widely recognized. It was designed in the 1930s and has not been comprehensively updated in the decades since to reflect fundamental changes in the economy, which has steadily shifted toward services and technology and away from the production and consumption of manufactured goods. As such, North Carolina’s tax system is unable to raise adequate revenue for public investments and is susceptible to wide fluctuations in the amount of revenue raised from year to year. Moreover, it is upside-down: Low- and middle-income taxpayers pay a greater share of their income in state and local taxes than higher income taxpayers.

Unfortunately, the governor and the Legislature missed an opportunity to fix these harmful flaws. This failure will make it more difficult for North Carolina to gain a sound footing in its recovery from the recession and become a full participant in the 21st century economy.