The conservative push to end NC’s income tax

Posted on: January 18th, 2013 by Siddhartha Mahanta 2 Comments

Republicans in North Carolina haven’t had it this good since 1870. That’s the last time they controlled both the state’s legislative and executive branches.

And they’re getting right down to business, pledging in interviews with local papers to pursue corporate and personal tax reform.

They’re also on something of a hiring spree. Just weeks after his victory in November, incoming Gov. Pat McCrory announced the appointment of retail mogul Art Pope — widely considered the GOP’s premiere in-state benefactor — as his deputy state budget director.

With Pope at the helm, progressives worry that state Republicans will flex their muscle by eviscerating public education, cutting unemployment benefits, and generally making life easier for North Carolina’s richest.

Pope, who until recently sat on the board of the Koch-funded Americans for Prosperity, has also funded prominent conservative state think tanks like the Pope Center for Higher Education Policy, the John Locke Foundation, and the Civitas Institute, which he founded in 2007. Those outfits have championed conservative ideas on everything from agriculture and tax policy to law enforcement.

According to an in-depth analysis of Pope’s fundraising conducted by the progressive Institute for Southern Studies, Civitas Action, an affiliate of the Civitas Institute, contributed just over $196,000 in 22 races in 2010; nearly three-quarters of the money came from Pope’s store chain, Variety Stores. It was money well spent: 18 of the 22 candidates backed by Pope, et. al, won, according to the analysis.

Bob Phillips, executive director of Common Cause North Carolina, says that Pope-led Republicans in North Carolina now find themselves in a powerful, unique position.

“For years, the Locke Foundation and Civitas and the other organizations’ proposals have been adopted by the Republicans,” Phillips says. “Now that they’re in power, a lot of this stuff will probably move at a more successful rate than they have enjoyed in the past.”

Pope isn’t the only Civitas alum who has signed up for public service. Thomas Stith and policy analyst Chris Hayes, former lobbyists for Pope-backed organizations, are also on the staffs of Gov. McCrory and House speaker Thom Tillis, respectively.

In recent interviews with local media outlets, Sens. Bill Rabon and Bob Rucho, prominent members of the assembly, said that lawmakers will be plunging headlong into tax reform when they convene on January 30. Rucho, specifically, threw his weight behind replacing the state’s income tax with a consumption-based sales tax—an idea that the Civitas Institute has championed.

In the past, Civitas has teamed up with a consulting firm run by noted conservative economist Arthur Laffer to produce research recommending a heavy diet of state income tax cuts.

Laffer asserts that uncompetitive state income tax rates are a key factor in Americans’ decisions to move from one state to another—a contentious position, and one that frequently puts Laffer at odds with the progressive Institute on Taxation and Economic Policy (ITEP).

“I don’t believe that people just move for sport,” Laffer wrote in an email to The American Independent. “People move because they have an incentive to move elsewhere—sometimes these incentives are economic and sometimes they are not. While there are a number of reasons one might move, the opportunity for a good job or greater after-tax income can be one heckuva powerful incentive.”

In a paper published in December, one of Laffer’s groups, the econometrics firm Arduin, Laffer, & Moore, worked with Civitas to analyze the consumption-based tax proposal floated by some Republicans.

The report pins the blame for North Carolina’s economic woes on its “exceptionally high personal income tax rate” of 7.75% for top earners, “an uncompetitive corporate income tax compared to other states in its region” of 6.9%, and “an overall tax burden that has gone from generally below the national average to generally above the national average—the 17th highest in the nation, and the highest tax burden compared to all of its neighboring states.”

To fix North Carolina, the Civitas-evaluated plan would eliminate the personal income tax, corporate income tax, and franchise tax, which is assessed on companies that do business in the state, and shift to a consumption-based tax system.

The plan would tax all “services currently taxed in at least one state,” expand certain fees on real estate and businesses, and be revenue neutral (meaning that amount it loses in revenue is offset by the amount that it raises). It would also zero-out all current sales tax exemptions, preferential rates, and refunds.

The sales tax would also be assessed on grocery purchases and out-of-pocket medical expenses—moves that would hit low and fixed-income households especially hard. But the Civitas paper does mention the possibility of exempting these costs for low-income individuals.

According to the Federation of Tax Administrators, there are almost two hundred different types of services taxed in at least one state, which include everything from hair cutting to fur coat storage. Some are taxed in one or a few states, while others are taxed in most states.

But ITEP senior policy analyst Carl Davis explains that many services are consumed chiefly by businesses. The “general consensus,” he says, is that such services should be exempt from the sales tax to avoid situations where the value of some goods or services are taxed multiple times, with the final bill being passed on to the consumer.

“One danger is that North Carolina decides to repeal or drastically cut its income tax, but fails to find political agreement on taxing a wide swath of services, and so just decides to enact a tax package that loses a massive amount of revenue overall,” Davis says.

The Civitas-Laffer paper is less clear on the size of the ideal sales tax. “As long as the tax base is sufficiently expanded, the proposed tax reform can be implemented with a reasonable state sales tax rate,” the report says. Any lost revenue could be extracted through new taxes on businesses and real estate, and by expanding the sales tax base to include products and services not currently taxed.

Had North Carolina had implemented a such a system in 2000, Laffer claims, the state’s expected average personal income growth would have been increased to between 4.4 and 4.7 percent. Making the shift now, he estimates, could increase the state’s personal income growth anywhere from .38 to .66 percent, annually.

While it’s not clear what form a state sales tax would take in North Carolina, numerous tax experts and studies have argued that taxing consumption, rather than income, places a heavier burden on low- and middle-income households.

ITEP’s Carl Davis says that sales taxes hit low-income families hardest because they have to spend so much of what they earn on things subject to the sales tax just to get by.

In a 2011 study, ITEP found stark disparities in the share of income paid out in sales taxes by low-, middle-, and high-income groups. Low-income families typically spend three quarters of their income on goods and services subject to sales taxes, while middle- and high-income families spend half and a sixth, respectively.

“Much of the upper-income person’s take home pay is being socked away into savings rather than spent on things that the sales tax covers,” Davis writes in an email to The American Independent. “The impact is a lot more noticeable for people at the bottom, and that’s exactly why a handful of states have low-income credits designed specifically to offer sales tax relief to the poor.”

Civitas’ Brian Balfour rejects this framing of the tax issue, and suggests that government is doing more than it should.

“One problem that we find when you try to analyze the tax structure through this progressivity/regressivity lens, is it’s attempting to accomplish some social engineering goals,” he says.

Concerns about regressivity, according to the Civitas paper, do not “account for the beneficial impacts to all residents created by the accelerated rate of economic growth”—a response typical of Laffer. Any strain that consumption taxes put on lower- and middle-income households, the paper adds, can be offset through other “modifications to the sales tax system.”

The point of the group’s proposal, according to Balfour, is to facilitate economic growth. “When you look at states that struggle to grow, economic stagnation is highly regressive, because low income, low-skilled people are hurt the most.”

To help sell North Carolina on eliminating its income tax, Civitas is hosting a public, $20-head reception for North Carolinians to hear Laffer lay out his vision for their state. It has also been gathering signatures for an online petition supporting the elimination of the income tax, and has created a Facebook page to support the campaign. Since its creation on December 7, 2012, the page has received 996 likes.

Screenshot of Civitas' noincometaxnc.org