Personal Tax Cap Would Put Local Communities in a Bind

OPPOSE CREATING PRESSURE ON LOCAL GOVERNMENTS TO INCREASE TAXES AND CUT SERVICES BUDGET & TAX CENTER FACT SHEET

REASON #3

Property and sales taxes could be forced to increase

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Alexandra Sirota Budget & Tax Center [email protected] or (919) 861-1468

NORTH CAROLINA JUSTICE CENTER P.O. Box 28068 Raleigh, NC 27611-8068 (919)856-2570 www.ncjustice.org

Amending the state Constitution to cap the personal income tax rate would put enormous pressure on local governments to replace state funds or to cut vital services like education. Years of state tax cuts have already reduced funds available to local governments, and capping the income tax at historically low levels will make that funding pinch permanent. Local governments may be forced to increase property and sales taxes Capping the personal income tax will likely reduce state funding that passes to local governments and school districts. According to the nonpartisan Fiscal Research Division of the N.C. General Assembly, revenues will likely fall short of what is needed to maintain current state services and funding starting in fiscal year 2019-20, 1 and if the income tax rate is capped, the state will likely reduce funding for local governments to fill the hole. All of this will leave it to local governments to make up for lost state funds, creating substantial pressure to increase property and sales taxes. Already since 2013, at least 50 counties in North Carolina have increased property taxes over the 2008-09 rates in order to keep up with the growing costs of public services and the decline in revenue sources. 2 Increasing property taxes has its limitations, however, particularly in struggling communities where property values are not appreciating rapidly. The sales tax is similarly problematic in that even as the base expansion could serve to grow the dollars received from sales tax, 1.) It is not able to make up for the loss in income tax revenue, and 2.) State policymakers have already begun to step back from their commitments to make sure communities are kept whole with distribution changes. 3 Local governments may be forced to cut services Many communities will struggle to make up for decreased state funding, even if they are willing to increase property taxes and other sources of local revenue. Particularly in economically struggling communities where property values are not increasing, and where stagnate wages are limiting the growth of sales tax revenues, local governments have few options to replace the state funding that is likely to disappear. Local leaders will then be forced to choose which local services to cut and to defend these painful choices to their constituents. Bond rating agencies don’t like income tax caps Fiscal constraints are inherently risky because they limit the flexibility states have to respond to changing fiscal circumstances. Because of this risk, bond rating agencies have warned that capping income tax rates could result in credit rating downgrades, particularly during challenging

1

Fiscal Research Division, North Carolina General Assembly. (2017). Analysis of Property Tax Survey Results, 2014-2015 to 2008-2009, NC County Commissioner Association. 3 http://pulse.ncpolicywatch.org/2016/06/03/senate-is-raiding-local-coffers-to-pay-for-tax-cuts/ 2

economic times. For example, The Fitch rating agency observes that “inflexible statutory or

constitutional operating limitations are potential credit risks, as they constrain an issuers ability to react to negative developments” 4

This concern was reiterated when Georgia passed an initiative to limit income tax rates. “A significant strength of state management lies in its broad powers and resources to manage its finances in the face of volatility. Georgia’s constitutional cap has stripped the state of that option with respect to its personal income tax.” 5 Like Georgia, North Carolina relies on personal income taxes as its largest source of state revenue, so the risk is likely to be viewed in similar terms by rating agencies. Deepest economic challenges won’t be addressed Imposing a low income tax rate cap primarily benefits wealthy urban residents and multistate corporations, but has proven ineffective in boosting economic opportunities in many rural communities. 74 of North Carolina’s 100 counties did not match the state’s overall rate of economic growth between January of 2014, when the first round of income tax cuts took effect, and January of this year. Perhaps even more tellingly, 1/5th of North Carolina’s counties have lost jobs since income tax cuts started taking effect. Even after years of tax cuts, people looking for work outnumbered the jobs available in 87 counties at the end of last year. 6

4

Fitch Ratings. (2016). “U.S. Tax-Supported Rating Criteria.” http://www.vermonttreasurer.gov/sites/treasurer/files/cash-investments/Fitch%20US%20TaxSupported%20Criteria%20April%2018%202016.pdf 5 Moody’s Investment Service. (2014). “Georgia’s Voters Cap Income Tax Rate, Reducing Financial Flexibility for the State.” 6 Kennedy, B. (2018). “In 87 counties, there are more jobless workers than there are job opportunities.” North Carolina Budget and Tax Center. http://www.ncjustice.org/?q=budget-and-tax/87-counties-there-are-more-jobless-workers-there-are-job-opportunities

In many communities, the lack of investment and job opportunities is creating pockets of deep poverty. In roughly one-fifth of North Carolina’s counties, more than 10 percent of the households are struggling to survive on $8 a day or less per family member. 7 Federal funding cuts could compound challenges Federal tax cuts passed in 2017 could lead to reduced grant and pass-through funding coming to local governments. We have already seen multiple proposals to reduce federal funding for local economic and community development, social services, housing, and a range of other local priorities that rely on federal support. Reduced federal funding is likely to be particularly challenging for economically struggling communities that are more reliant on federal funds than their more prosperous neighbors.

North Carolina’s legislative leaders are seeking to cap North Carolina’s personal and corporate income taxes in the state Constitution even after years of tax cuts have hurt our state’s ability to build thriving communities. The next few weeks are crucial in this debate and will have huge implications for our efforts to build an equitable and inclusive economy. Key Concerns with the Proposed Income Tax Cap •

It is unnecessary to set a low income tax rate in the state Constitution.

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It limits the tools policymakers will need to respond to federal cost shifts to the state.

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It jeopardizes North Carolina’s ability to meet current and future needs.

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The wealthiest get a permanent annual tax break.

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Sales tax and local property taxes will likely rise as result.

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Changing the state Constitution to limit tax options threatens North Carolina’s democratic process. Find out more at www.NCJustice.org/NoNCTaxCap

7

Kennedy, B. (2018). “Rates of Deep Poverty are Rising in NC and Nation.” North Carolina Budget and Tax Center. http://www.ncjustice.org/?q=budgetand-tax/rates-deep-poverty-are-rising-nc-and-nation