@NCCapitol

@NCCapitol

Proposed income tax cap amendment advances in House

Posted June 20, 2018 1:01 p.m. EDT
Updated June 20, 2018 1:16 p.m. EDT

State budget

— Republican legislators moved a proposed constitutional amendment to cap state income taxes at 5.5 percent through committee Wednesday over objections from Democrats who said the bill would handcuff future General Assemblies.

When recession hits, it's going to mean budget cuts and sales tax increases that hit the poor hardest, critics warned.

Republicans pointed to the upsurge in North Carolina's economy since they took over in 2011 and began cutting taxes. They pointed to an increased "rainy day" fund and dismissed the dire warnings Democrats have voiced for years over problems Kansas has experienced after the GOP majority there cut taxes.

"The sky has not fallen," said state Sen. Tommy Tucker, R-Union, one of the bill sponsors. “When the recession comes, you’ll be able to raise ample dollars."

The state's corporate income tax rate is 3 percent now and slated to drop to 2.5 percent next year. The personal income tax is 5.499 percent and slated to hit 5.25 percent next year. This constitutional amendment would cap both rates at 5.5 percent. There's already language in the constitution capping them at 10 percent.

If a recession does hit, the state would still have several levers it could push to bring in new revenue, Tucker said during committee, quoting numbers from legislative researchers:

  • A 1-cent increase in the sales tax would bring in about $1.6 billion
  • A quarter-point increase in the personal income tax rate, taking the state from its planned 5.25 percent rate back up to the proposed cap, would bring in $575 million .
  • A quarter-point increase in the corporate tax rate would bring in $250 million

Tucker initially misquoted the personal income tax figure, saying the increase would bring in about $2.3 billion. That's for a 1 percentage point increase in the rate, as he corrected later in the meeting.

He also noted that the state can "broaden the base" on sales taxes, which would mean charging the state sales tax on more goods or services.

Gov. Roy Cooper proposed freezing the corporate rate and keeping the personal income rate where it is for people making $200,000 or more a year as part of his budget proposal this year. He would have put that extra revenue toward new education funding.

The GOP-controlled legislature rejected the proposal, going through with tax cuts promised several years ago and funding raises for state employees and teachers within existing revenue projections. The difference between the two budgets is a major issue between Republicans and Democrats at the statehouse as North Carolina heads toward November's elections, which will determine control of the General Assembly.

There are some concerns over what the lower income tax caps would mean for North Carolina's AAA bond rating, which ensures that the state pays less interest on borrowed money. State Treasurer Dale Folwell said Wednesday that he's never had a rating agency express concerns with the proposal, which has been floated for years.

"In my world, they don't wait to be asked," Folwell said.

To take effect, the proposed amendment must clear both chambers of the legislature with three-fifths support, then be approved by a majority of voters. The bill heads now to the House floor, where it will likely be voted through in the coming days.