A bill that would give North Carolina voters the option to change the maximum income tax rate from 10 to 5.5 percent passed the Senate Finance Committee Tuesday.
Opponents are worried the cap could put the state’s bond rating at risk, limit the state’s options during an economic downturn, and lead to tax increases in other areas.
If passed by both chambers, Senate Bill 817 would propose an amendment to the state constitution on the general election ballot. If a majority of voters vote in favor of the amendment, the tax rate cap would go into effect in January 2017.
Many might connect the bill to the Senate’s attempt at a “Taxpayer Bill of Rights,” also known as TABOR, which failed to gain traction in last year’s long session. That bill, in addition to capping the income tax rate at 5 percent, would have limited the annual budget spending to population growth plus inflation.
The only other state to pass such a bill is Colorado. According to the non-partisan Center on Budget and Policy Priorities in Washington, D.C., the state’s K-12 education suffered as a result.
Terry Stoops, the director of education studies at the John Locke Foundation, said he doesn’t see this bill as directly linked to TABOR — but instead as a step towards Senators’ long-term tax policy goal.
“This is just a way of putting a limit to it in the short term, with a long-term goal of eliminating the income tax altogether,” Stoops said. “It’s just an attempt to reform the tax code to make it look a certain way,” he said.
Stoops said he doesn’t think the tax rate maximum would have “a crippling effect on education revenues, just because this only addresses one of many sources of revenue.”
The limit would apply to both the corporate and personal income tax rates. The current corporate income tax rate is 4 percent and, according to the bill summary, is expected to fall to 3 percent in 2017. The current personal income tax is 5.75 percent and is expected to fall to 5.49 percent next year.
Since both tax rates are expected to fall below the proposed maximum, the bill wouldn’t immediately affect the state’s funding.
Alexandra Sirota, director of the N.C. Budget and Tax Center at the N.C. Justice Center, said the cap sets the legislature’s tax cuts into stone.
“They have proven that they can cut income taxes to below 5.5 percent, and they’ve done that,” Sirota said. “So amending the state constitution does nothing more than just make that permanent.”
She said the impacts extend to all services provided to a community, including investments in education — like classroom materials, quality teachers and teacher assistants, and safe buildings.
Sen. Floyd McKissick, D-Durham, said at the Senate Finance Committee that he doesn’t see the need for the cap when the state’s needs can fluctuate as much as they did during the Great Recession.
“That gives me deep concern, when I think that we need to reserve the possibility for future General Assemblies — being that there’s a time of financial crisis, if there’s unforeseen circumstances of emergencies, or natural disasters — they’re able to address it and take care of it,” McKissick said.News