Raleigh, N.C. — On the day that has become synonymous with taxes, Gov. Pat McCrory promoted the changes to North Carolina's tax code that lawmakers approved last year, saying they are already helping state taxpayers.
Critics of the tax reform effort disputed McCrory's premise, however, arguing that the overhaul will cost the people who can least afford it the most.
"For the first time in eight years, North Carolina’s unemployment rate has dropped below the national average, and I think, with tax reform, we’re going to continue to get better and better results,” McCrory said.
Lawmakers replaced the three-tiered income tax structure with a flat 5.8 percent tax on everyone. For a family making $21,000 a year, it's a 0.2 percent tax cut, compared with a 1.95 percent cut – almost 10 times larger – for a family making more than $100,000.
"We're leaving a little extra money in everyone's paycheck," McCrory said, "so they can buy save and invest more for their families."
Come next April 15, taxpayers will see fewer deductions and credits. As part of the overhaul, lawmakers didn't extend the Earned Income Tax Credit, which helped more than 900,000 low-income households last year, and they cut the child care deduction and the annual sales tax holidays for back-to-school shopping and purchasing energy-efficient appliances.
Alexandra Sirota, director of the left-leaning North Carolina Budget & Tax Center, said the average family will pay more overall under the new system.
"What they passed last year amounts to a tax shift," Sirota said. "High-income folks (and) profitable corporations will see their taxes go down on average, and the low- and middle-income working families in North Carolina will see their taxes go up."
According to nonpartisan experts, a married couple with two children making $250,000 a year will get a tax cut of $2,318. A similar-size family making $20,000 a year will go from getting a $222 refund to owing $40.
John Hood, president of the conservative John Locke Foundation, agrees that North Carolina's tax reform has created winners and losers, but his analysis finds more winners.
"The tax bill enacted last year will reduce the tax burden for most North Carolina families and businesses while increasing job creation, entrepreneurship and economic growth in our state," Hood said.
He called Sirota's numbers "mathematically impossible," saying a majority of studies show higher overall tax burdens were associated with lower economic performance.
"Wealthy North Carolinians will also receive tax cuts as well, but not at the expense of low- and moderate-income households," he said.
Dave Ribar, a professor of economics at the University of North Carolina at Greensboro, dismissed claims that the tax reforms are helping employment rates in the state, noting that 64,000 people left the labor force in North Carolina last year.
"The big drop that we’ve seen in unemployment has come mostly from people who’ve just given up looking," Ribar said.
McCrory said it will take time to see which side is right, but he contends that tax reform will help the state economy. Lawmakers also cut the corporate tax rate by nearly 1 percent, and the governor said such reforms are already helping to attract new businesses to the state.
"We couldn't keep the status quo of an existing tax system which was not competitive with the rest of the United States, the rest of the world, much less our neighbors in South Carolina, Tennessee and Virginia," he said. "That was unacceptable, so we had to give and take."