Proposed cap on NC income tax rate clears Senate

Posted March 14

— The state Senate voted Tuesday to put a proposed constitutional amendment setting a 5.5 percent limit on the state income tax rate before voters next year.

After the 36-13 vote, Senate Bill 75 moves to the House, where it will need at least 72 votes to pass and go on the November 2018 ballot. Gov. Roy Cooper has no say on proposed amendments.

Current tax rates are 5.499 percent for individuals and 3 percent for corporations.

The state constitution already caps income tax rates at 10 percent, but Republican lawmakers said they want to tighten the reins on future state spending by cutting that limit almost in half.

"This will implement taxation discipline in the future," said Sen. Tommy Tucker, R-Union. "I certainly hope that it will caution future General Assemblies to watch their spending."

Democrats protested the move, saying it would tie the hands of future legislatures if the state needs to raise revenue to deal with an economic downturn or a natural disaster. That, in turn, could threaten North Carolina's AAA bond rating and lead to higher borrowing costs.

Sen. Jay Chaudhuri, D-Wake, said North Carolina has always had "two legs" for revenue growth: income tax and sales tax.

"How can the state possibly move forward during an economic recession when you've cut off one leg?" Chaudhuri asked.

"I can't imagine raising the income tax on people during a recession," Tucker responded, noting other options for raising revenue exist, such as raising the corporate tax rate or the sales tax rate.

Democrats argued that higher sales taxes would hurt lower-income families more than retaining the flexibility to reinstate a graduated income tax would hurt wealthier North Carolinians.

Chaudhuri also noted that the state's economy is becoming more service-based, and although the GOP has expanded sales tax in recent years to include some services as it cut income taxes, many services remain untaxed and generate no additional state revenue.

Republicans responded that it's up to the voters to decide, and the legislation would give them that option.

"We're not limiting options. We're not limiting choices. We're not setting a rate on an income tax cap. We're allowing the public to have a voice," said Sen. Andy Wells, R-Catawba. "Some members (of the General Assembly) are confident they will make the right choice. Some members are scared to death those voters will make the right choice."

"When you give people the choice of what their tax rate can be, I think they'll generally always choose the lower number," said Sen. Ralph Hise, R-Mitchell.

The Senate passed a similar bill last year, but it ran into opposition in the House, where lawmakers feared it would not give legislators enough latitude in case of a fiscal emergency. Former State Treasurer Janet Cowell also expressed such concerns, but current State Treasurer Dale Folwell has said he's not opposed to the bill.

Alexandra Sirota, director of the liberal North Carolina Budget & Tax Center, said the amendment would shackle efforts to invest in the state's future.

"By placing a low and arbitrary income tax cap into our state constitution, lawmakers are taking democracy out of the budget process," Sirota said in a statement. "They are aiming to lock in their desired choices and limit the choices of North Carolinians tomorrow, 10 years from now and 100 years from now."

But the conservative group Americans for Prosperity praised the Senate's move, saying Cooper's proposed spending increases don't bode well for North Carolina's economic future.

"This bill will protect individuals and families currently paying North Carolina’s lowest tax rate in decades from lawmakers who only see spending increases and tax hikes," AFP state director Donald Bryson said in a statement.


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