This November, North Carolina voters will decide on a constitutional amendment to lower the state’s cap on income taxes to 7 percent from its current level of 10 percent.
Lowering the cap will not actually result in a tax decrease; the personal income tax is a flat rate of 5.499 percent and the corporate income tax is currently 3 percent. Both rates are scheduled to decrease in 2019. If adopted, the amendment would protect taxpayers from future rate increases past 7 percent.
This is a needed protection; you do not have to go back far into North Carolina’s history to see both income tax rates above 7 percent. The highest personal income tax rate was 8.25 percent from 2001 to 2006.
Critics of the proposed amendment say that lowering the cap would threaten the state’s fiscal stability during recessions. This assertion is based in part on the flawed premise that a state should raise revenue, instead of cut spending, during recessions. It also overlooks the common-sense measure of setting aside funds during flush economic times in anticipation of the next recession.
Senator Floyd McKissick (D-Durham), at a recent event sponsored by the left-wing blog NC Policy Watch, pointed to the 2008 recession as evidence that the income tax cap “is problematic in terms of giving the flexibility to help the state of North Carolina out in years to come if we face another recession.”
What the Left fails to acknowledge is that liberal Democrats controlled the state government leading up to 2008. Their high-tax, high-spend policies did not position the state to adequately handle the downturn. Indeed, such policies served to make the budget crisis worse.
McKissick goes on to say that it is short-sighted to lower the income tax cap. This could not be further from the truth when you look at how the state has historically handled recessions through not-so-temporary tax increases.
North Carolina’s tax history demonstrates that “temporary” tax increases passed during economic recessions often persist into economic recoveries. As the economy improves, revenue increases dramatically under the heightened tax rates. This drives up spending commitments to unsustainable levels, compounds the next recession’s revenue shortfalls, and leads to more tax increases. It is a vicious cycle that comes at the detriment of North Carolina citizens.
This pattern was evident during Governor Cooper’s time in the General Assembly in the 1980s and 90s. The trend continued into the 2000s and came to a breaking point with the 2008 recession. Years of undisciplined spending left the state ill-positioned to respond to the financial downturn. Among the mitigating circumstances was the virtual non-existence of a “Rainy Day” fund, as liberal leaders refused to set aside money in spite of years of significant budget surpluses.
In recent years, the state has shifted away from the progressive cycle of perpetual tax increases and overspending. The General Assembly lowered both income tax rates in 2013 and continues to do so. The state has cultivated its rainy day fund to $1.8 billion. The state should continue to move forward with fiscal responsibility. This means looking for ways to spend taxpayer money more efficiently on core government services and continuing investment in the state’s rainy day fund to enable budget writers to weather future recessions without resorting to tax hikes.
Far from being short-sighted, the proposed constitutional amendment illustrates the foresight on the part of state policymakers to acknowledge that future legislators could easily fall back into the old cycle if appropriate limitations are not enacted. Lowering the constitutional tax cap is an opportunity for North Carolina citizens to protect themselves against that threat and keep the state moving in the direction of fiscal responsibility.