Class warfare looms in debate over state tax reform
Tax reform was one of the top issues tackled by the new Republican majority in Raleigh last year, but voters hitting the polls this election season don’t yet know whether they’ve come out ahead or behind, since the changes don’t come into play until next April’s tax returns.
The debate over tax reform has hues of class warfare. Democrats claim the tax cuts helped the rich and hurt the poor. Republicans claim the old tax structure was punitive for higher-earners, and lower taxes will improve the overall business and economic climate, in turn helping all.
The single biggest change is a flat income tax rate for all — instead of the old graduated scale where the rich paid a higher tax rate than the poor and middle class. The income tax rate is now the same 5.75 percent for everyone.
“We think it is an important step in North Carolina history,” said Jim Tynen with the Civitas Institute, a conservative think tank in Raleigh. “When you are taxing income you are penalizing people for producing and making more money. And that hurts overall productivity.”
N.C. Rep. Joe Sam Queen, D-Waynesville, has been a vocal critic of the tax cuts, chalking them up to political kickbacks for millionaire campaign donors.
“The more money you make the bigger your tax cut was,” Queen said.
The rich saw their income tax rate come down 2 percent, the middle class by 1.25 percent, and the poor by only 0.25 percent.
But Tynen disagrees that the rich are winners and the middle class are losers in the new tax code.
“By cutting taxes we believe there will be an economic boom. The people who need jobs most are the lower and middle class. If taxes are less burdensome, and you get rid of punitive regulations, that will mean more jobs and better paying jobs overall for people in the lower middle class,” Tynen said. “I think our critics are jumping to a conclusion. These rates have just gone into effect. Time will tell.”
Roy Cordato with the John Locke Foundation, also a conservative think tank based in Raleigh, said state legislators took a bold and needed step to eliminate a litany of tax loopholes and breaks for special interests.
“From an economics perspective, what was done was exactly right,” Cordato said.
Tax loopholes, even popular ones, were closed. Yes, people will no longer get tax credits for college savings plans, for senior medical expenses, for childcare costs or for educational expenses like college tuition.
But in exchange, the income tax rate for everyone came down.
“What the legislature did was reduce all our tax rates,” Cordato said.
Queen said the claim is a farce, however, because for many in the middle class, the loss of tax credits and exemptions will mean they pay more taxes at the end of the day.
“It is hitting the middle class the most while taxes have been cut substantially for the wealthy,” Queen said. “You have to cut through the deception and distortion. You are paying more taxes even though your rate is lower.”
Further, sales tax is now tacked on to things that used to be exempt, from mobile homes to oil changes to college meal plans. There’s no more sales tax holiday for back to school supplies, and sales tax is now tacked onto museums, concert tickets and sporting events.
“They’ve added more sales taxes than they’ve cut,” Queen said.
Tynen pointed out those purchases are optional, however.
“If you feel the sale tax on your movie ticket is too exorbitant, you don’t have to buy it,” Tynen said.
A better business climate?
In the name of reform, tax incentives for certain industries were also eliminated.
Developers of historic properties or affordable housing projects will no longer get special tax credits that others don’t. The movie industry will no longer get economic incentives that others don’t.
“There were loopholes everywhere for this special group or that special group,” Cordato said.
But once again, in exchange for closing loopholes, the corporate tax rate as a whole was lowered. The reforms made taxes “a little lower and also fairer,” Tynen said.
N.C. Sen. Jim Davis, R-Franklin, said the changes were all about improving the state’s business and jobs outlook.
“It is more business friendly now. Our actions have moved North Carolina from the bottom to 17th best in the business tax climate,” Davis said.
Haywood County’s Economic Development Director Mark Clasby said that should help the jobs outlook.
“From a business standpoint trying to be attractive, lowering the corporate income tax was a benefit from a recruitment standpoint,” Clasby said. “That it is helpful because it is a very competitive world out there right now.”
But Democrats claim the corporate income tax cut primarily helped the most profitable companies at the expense of the state as a whole.
“It went wildly disproportionately to the top,” Queen said. The top 200 corporations got an average tax cut of $1 million each, he said.
Meanwhile, the corporate tax cuts took money out of the state budget, which in turn meant cutting vital state programs. The tax cuts, all told, will take $700 million out of the state budget this year, and a projected $5 billion over the next five years as more scheduled tax cuts hit the books, according to state budget officers.
And that means less to spend on things like education.
“They’re giving millionaires tax breaks and cutting education,” said Queen.
Doug Jackson, a spokesperson for the pro-education advocacy group Aim Higher Now NC, said it doesn’t make sense to take a bite out of the state budget when schools are struggling.
“The cuts to education could be easily ameliorated if they did away with these tax cuts that primarily benefit the wealthy,” Jackson said.
But Tynen disagrees.
“There is a lot of debate over the necessities of keeping tax rates as low as feasible and balancing a budget that had gotten out of whack considerably,” Tynen said.
Republican legislators also laud the elimination of the estate tax, but Queen again chalks that up as a “privileged tax cut for the super rich only.” The estate tax only applied to individual assets of over $10 million.
“There wasn’t a single citizen we could find in my district who was wealthy enough to pay the estate tax,” Queen said.
Going the distance
Davis said cutting taxes was only part of the equation to make the state more business friendly. Republicans have also slimmed down the regulatory environment.
“We had regulations that were stifling government, industry and individuals,” Davis said.
Rep. Michell Presnell, R-Burnsville, also supports overhauls to environmental regulations.
“We eliminated and changed over 100 regulations to remove the regulatory burden on businesses,” Presnell said in a written statement.
But Julie Mayfield, the director of WNC Alliance environmental advocacy group, said weaker regulations will come at the expense of natural resources.
Public enemy number one for the environmental community is “regulatory reform,” which calls for a systematic rewrite of each and every environmental rule that industry considers a thorn. If a rewrite isn’t settled on, the regulation automatically expires. Mayfield called it a “disaster.”
“The environmental community thinks this entire process was set up to eliminate rules industry doesn’t like by making it so difficult to readopt them,” Mayfield said.