North Carolina: General Assembly proposes constitutional amendment to cap the income tax rate at seven percent
Currently, the 2018 income tax rate in North Carolina is 5.499 percent, down from 5.75 percent in 2017. This flat rate is the result of recent North Carolina tax reform that simplified the tiered rate schedule previously in effect at 6, 7, and 7.75 percent rates. Current law further provides that the North Carolina income tax rate will drop to 5.25 percent in 2019, while the corporate income tax rate is scheduled to drop from 3 percent to 2.5 percent in 2019.
If voters approve SB 75, it would take effect on or after Jan. 1. But because the proposed 7 percent income tax cap is well above current rates, the constitutional change would not have an immediate impact on tax rates. The cap would, however constrain the North Carolina General Assembly from raising the income tax rate above 7 percent in the future without voter approval.
ADVOCATES CLAIM PROPOSAL WOULD IMPROVE TAX CLIMATE
In October 2017, when the Tax Foundation published its 2018 State Business Tax Climate Index, the group recognized the Tar Heel State's tax system ranked 11th overall. North Carolina climbed the rankings from the 41st position just three years ago. In the Tax Foundation’s view, North Carolina’s reforms across corporate tax, individual income tax, unemployment insurance tax and sales tax continue to improve its rankings. The corporate tax component was North Carolina's highest ranked area, ranking third among the other states. The Tax Foundation credits North Carolina for its flat income tax rate structure that replaced its progressive, multi-tiered system. Supporters contend that the constitutional income tax rate cap would continue to improve North Carolina’s tax climate.
Opponents of the tax cap contend it would be harmful to educational spending. But supporters disagree. Quoting State Director of Americans For Prosperity, North Carolina, Chris McCoy, The News & Observer suggested “[i]f a 5.5 percent tax rate were bad for education, you would think we’d see some evidence of those ill effects right now, since our tax rate is currently at that level.”
OPPONENTS ARGUE LOWERING INCOME TAX CAP BENEFITS THE RICH
Not everyone thinks the tax cap is a good idea. Opponents of North Carolina’s tax cap contend the tax cap will impose a serious burden on those who are less able to pay, while benefiting the wealthy and powerful. Quoting Rep. Graig Meyer, an Orange County Democrat, The News & Observer suggested “[c]aping the income tax could shift the tax burden onto lower-income residents. If the state cuts funding for services that counties use, counties will find other ways to pay for those services.” He also stated “When you limit the income tax, you push out the tax burden on to property taxes, sales taxes and user fees. Those taxes tend to disproportionately impact working people and poor people. Whereas the income tax you can use to raise more money from wealthy people who have high salaries."
Critics further allege North Carolina’s tax cap prevents the state from building thriving communities. Specifically, the tax cap has drawn the concern of educational groups because income taxes are the largest source of state revenue and public education makes up such a large part of state spending. President and Executive Director of the Public School Forum of North Carolina Keith Poston, The News & Observer suggested “[c]apping the income tax could limit the state’s ability to adequately fund public education and other important public services.” Further he states, “[i]t could be devastating. Our schools are underfunded, and this will lock it in permanently by making it part of the state constitution.”
Voters will decide on this measure in the statewide general election scheduled for Nov 6. We will be tracking this measure and upcoming developments.