Analyst: Tax Burden Shifted - Brevard NC
The tax law changes passed by the North Carolina General Assembly and signed into law by Gov. Pat McCrory last year shift more of the tax burden from the wealthy to the poor and middle class while reducing public investments.
Tazra Mitchell, a policy analyst for the N.C. Budget and Tax Center, told a crowd of roughly 80 people attending a Forum Project last Tuesday night in the county library that the new tax laws benefit the wealthiest North Carolinians “at the expense of everyone else.”
Mitchell said the new tax laws are shifting the burden from the top 20 percent income earners to the lower 80 percent. People in the lower 80 percent income brackets will see their overall state tax increases about .2 percent, to just over 9 percent. The state’s wealthiest individuals will see their tax burden decrease about 1 percent, from 6.5 to 5.5 percent.
“It (the legislation) did nothing to address the upside down nature of our tax code,” she said. “In fact, they made it worse.”
Mitchell said one of the biggest changes is the elimination of the Earned Income Tax Credit, which helps working poor people.
This is the last year that credit is available.
She said that while the state’s economy is slowly improving, the plight of workers is not. She said there is still just one job available for every three unemployed.
Mitchell said job growth in the state in 2013 was less than it was in 2011 and just slightly above job growth in 2012.
Our economy is still pretty weak and we have a long way to go,” she said.
Mitchell said the much touted drop in the unemployment rate also is misleading because the drop is primarily due to people dropping out of the workforce, not new jobs being created.
“The unemployment rate now really doesn’t tell us that much,” she said. “You have to take a deeper look at the numbers.”
Mitchell said the jobs that are being created “aren’t as good as the ones we’ve lost.”
Most of the new jobs are in the service sector, which pays low wages. As a result, there are many people who are working full-time but still qualify for government assistance because of their low wages.
Mitchell said that while worker productivity has increased, wages have declined.
In the recovery from the 2007 recession, productivity has increased 3.3 percent but wages have decreased 5.5 percent.
As a result of the lower wages, the percentage of workers living in poverty has increased from 25.6 percent in 2000 to 31.5 percent in 2012.
“Hard work just isn’t always enough,” she said.
Mitchell said there are more than 1.8 million North Carolinians who live in poverty, which is classified as a family of four earning $23,492 or less. North Carolina has the 10th highest poverty rate in the country. One in four of the state’s children live in poverty and nearly half of children of color live in poverty.
She said the Legislature, through tax policy, could have taken efforts to reduce poverty in the state, but instead “put the train on the wrong track” by cutting taxes for the state’s wealthiest residents.
Mitchell said more than 90 percent of the state revenues traditionally have come from three pillars: personal income tax, sales tax and corporate income tax.
“It used to be three pillars, but certain tax bases have been eroded,” she said, noting that the corporate income tax now only accounts for about 6 percent of state revenues.
In 2012, personal income tax accounted for 53 percent of revenues and the sales tax accounted for 26 percent of revenues. In 1970, personal income tax accounted for 33 percent of revenues, and sales taxes for 32 percent and corporate income tax for 14 percent.
Mitchell said that if certain revenue projections are hit, the corporate tax could be reduced to 3 percent.
She said the new tax laws are significantly reducing state revenue, particularly when population growth and inflation are taken into account.
The reduced revenues will result in reduced investments in education, infrastructure, public safety, etc.
She said the state is projected to receive between $624 million to $650 million less in revenue for the years 2016-2018.
“This tax system won’t grow the economy,” said Mitchell.
Mitchell said state spending is now below the 40-year average and is 8.3 percent below pre-recession spending levels.
“We’re way behind where we need to be,” she said.
The biggest decrease in state spending has been in natural and economic resources, where the budget is nearly 50 percent less than it was before the recession.
Mitchell said K-12 public education funding is down 6.4 percent and university system funding is down nearly 10 percent. Adjusted for inflation, state spending on education is $563 million less than it was six years ago even though there are 48,000 more students in the system.
As a result, there has been an increase in class size and a reduction in teacher assistants at the K-12 level, while universities are compensating by charging students higher tuition.
“We all know that money matters in the classroom,” she said.
She said the state should not be cutting investments in education, particularly when a skilled workforce is necessary to compete in a global economy.
“A skilled workforce isn’t an option; it’s a necessity,” said Mitchell.
She also said lawmakers’ claims that Medicaid is consuming too much of the budget and has to be fixed before other programs can receive more funding is “faulty.”
She said bad tax policy, not Medicaid, is the reason for major spending cuts.
“Five hundred and twenty-five million could have done a lot, but they chose to go down a different path,” said Mitchell of the reduction in the state budget.
Mitchell also said that roughly 48 percent of those who receive Medicaid are children while another 17 percent are disabled.
Working adults who are poorly paid account for another 21 percent of those receiving Medicaid.
“We are talking about vulnerable populations,” she said.
Mitchell said Transylvanians have felt the impact of the state budget cuts.
For example, the child poverty rate in the county is 29.7 percent as compared to 25.8 percent for the state. In the coming year, some 2,500 county residents will lose the Earned Income Tax Credit.
According to Mitchell, the unemployment rate in the county has dropped but that is due to people leaving the labor force.
She said more than 600 people locally dropped out of the labor force and there are actually fewer people employed in the county than last year.
She said the county has lost 45 state-supported teacher positions since 2007-08, but the county has paid for an additional 17 teachers.
“The local government has sort of picked up the tab,” she said.
Mitchell predicted that the unemployment rate should continue to decrease as more people leave the labor market. More people could also fall into poverty if funding for state and federal programs continues to be cut.
Worker productivity, which has increased, should continue along that trend.
Her overall prognosis is that the state will stagnate because there will be insufficient funds to invest in an educated and skilled workforce, which will ultimately lead to a deteriorating business climate.
Mitchell said research has shown that five states cut spending the most in 2007 have had the slowest economic growth. Their growth was just a third of the average of all the other states.
She also noted that there is no correlation between tax cuts and higher wages, but there is a direct correlation with wages and education.
“Investing in education is a way to spur economic prosperity,” she said.