By Eric Frazier
Sweeping new changes to the North Carolina tax code will touch the purses and wallets of virtually every taxpayer in the state.
Legislation approved by the General Assembly and signed into law by Gov. Pat McCrory last month will affect everything from the size of our annual tax bills to the way we shop for back-to-school clothes.
But that’s where the agreement ends.
Leaders of the GOP-controlled General Assembly say that by lowering corporate and personal income taxes, they’ve made the state a magnet for new companies and new jobs. Democrats say it drains the state of more than $2 billion in revenues in the next five years – a budget hole that they fear will be filled by cutting education or other government services.
Supporters say the plan will cut taxes for virtually all North Carolinians. Opponents say the rich will get the biggest benefit, and in some cases the middle-class or poor will pay more.
“It’s honestly a little bit of a mixed bag in terms of results,” said Rollin Groseclose, who serves on the board of the N.C. Association of Certified Public Accountants.
When his clients have asked him if they’ll save money, “For some I can say yes, and for some, I have to say no.”
He offered an example of a small-business owner. Previously, that person could deduct $50,000 in business income from his or her taxes. That exemption went away, he said, taking about $3,000 or $4,000 in tax savings with it.
“That’s going to eat into that (individual’s) reduction in tax rates,” he said.
On the other hand, he said, the cut in corporate taxes should have a beneficial effect on job recruitment. He said he has had corporate clients who either left North Carolina or decided not to come here because of the state’s relatively high tax rates compared to its neighbors.
The changes “put us at or below the Southeast region (average) in terms of corporate tax rates,” he said. “That’s going to be appealing” to out-of-state companies.
Alexandra Sirota, head of the left-leaning Budget & Tax Center, said the tax law, combined with legislation earlier in the session killing the Earned Income Tax Credit, represents a step back economically for low-income workers. The tax credit was a refund aimed at the working poor.
She said when her group analyzed the impact of both the new tax code and the elimination of the tax credit, it found that the bottom 80 percent of the state’s taxpayers will see their taxes go up.
Sirota said giving hefty tax breaks to the state’s wealthiest citizens leaves North Carolina with a precarious financial future – especially if the expected wave of new jobs doesn’t pan out.
“It’s very clear the promises that are being made in terms of significant job growth are not going to materialize,” she said. “I think North Carolina will lose its competitive advantage.”
State Rep. Ruth Samuelson, a Charlotte Republican, said she’s certain the tax cuts will spark more than enough economic growth to balance out the revenue lost.
She said the cuts should give North Carolina an edge in the chase for corporate relocations.
The state is already expected to add jobs, she said, even before the tax changes take hold. She cited research from an N.C. State University economist who forecasts the state will add more than 100,000 jobs this year and next. That would be enough, the economist found, to lower North Carolina’s unemployment rate to 6.8 percent. In June, the state’s jobless rate stood at 8.8 percent, fifth-highest in the nation.
Asked what would happen if that kind of progress doesn’t materialize, Samuelson said budget writers tried to be conservative with the growth forecasts.
“We’ve positioned the state to do well economically,” she said. “We’re not perfect, but we’ve tried to be responsible.”
Still, Groseclose, the CPA, said the tax changes didn’t go as far as the accountants’ group might have liked. The group argues that the state relies too heavily on personal income and corporate taxes, which it says can be too unpredictable during economic downturns.
Some of the CPA group’s members have said the state needs to shift more of its financial burden to a broader-based sales tax.
“Our first response (to the new law) was, ‘Did we go far enough?’ ” Groseclose said. “Our conclusion at the end of the day is that hopefully this was just a step in the right direction.”