New analysis: Most of NC senate’s “middle class” tax cut would actually flow to the wealthy

Last week, the North Carolina Senate Finance Committee approved Senate Bill 325 – sponsored by the chairs of the committee – that supposedly cuts taxes by nearly $1 billion. Proponents of the bill claim that the tax cuts are targeted to middle-income taxpayers, but this is not the case. The majority of the net benefits for the tax cuts will go to the highest income earners in the state. Simply put, this bill is not a billion dollar middle class tax cut, despite the title of the bill. This is a false claim that becomes apparent upon a deeper analysis of the bill.

For starters, the billion dollar tax cut claim touted by proponents is nearly 20 percent off the mark. The General Assembly’s Fiscal Research Division (FRD) highlights that the annual cost of the tax plan grows to be around $839 million over the initial five years. Moreover, tax cuts for businesses account for 20 percent of that total cost estimate. While one might chop this up to a simple rounding approximation, the magnitude of this rounding up on something of such importance would likely garner some form of reprimand in the business and finance world in which billion dollar deals require a more precise understanding of the numbers.

During last week’s meeting, bill sponsors and FRD staff were unable, and at times unwilling, to answer critical questions related to the tax plan. Limitations to the analytical software used by FRD were noted, which limited staff’s ability to answer key questions about who benefits and the cumulative losses of tax cuts over the years.

The limited analysis produced by FRD allows proponents of SB 325 to falsely proclaim that the tax plan largely benefits middle income taxpayers. Typically, FRD arbitrarily selects income levels and often deploys just taxpayer scenarios to highlight the impact of proposed tax changes. This approach doesn’t allow policymakers or the public to understand the population-wide effects and the distribution across all taxpayers.

BTC’s analysis of SB 325 uses a more robust model developed by the Institute on Taxation and Economic Policy (ITEP), a non-profit, non-partisan organization. ITEP’s microsimulation tax model calculates tax revenue yield and incidence, by income group, of federal, state and local taxes. The model is used in states across the country to analyze state tax proposals and to assess the impact of tax policies on issues of public concern. ITEP’s model segments North Carolina taxpayers into five equally split income groups based on actual tax returns and total estimated incomes (and breaks down the top 20 percent of taxpayers since income is so concentrated at the top of the spectrum). FRD informing lawmakers that a hypothetical taxpayer with adjusted gross income of $200,000 would get a tax cut under the plan provides no insight into the distributional impact of the tax plan, such as where that taxpayer falls along the income spectrum (certainly not in the middle). The ITEP model, however, highlights that this hypothetical taxpayer is closer to the top 10 percent of income earners in the state.

• Nearly half of total net tax cut benefits over current law under the proposed tax plan would flow to the top 20 percent of income earners. By contrast, only 29 percent of net tax cut benefits would flow to the bottom 60 percent of income earners – those with income of $57,000 or less. A move further away from the personal income tax and a greater reliance on sales taxes mean that the people hit the hardest by the tax plan are low- and middle-income taxpayers. Many taxpayers in the lowest income groups who live in counties with the highest levels of poverty already pay no income tax because the amount of income they earn is very low, and so their taxes will not change under this plan. Instead, these taxpayers primarily pay taxes through the sales tax, which results in them paying a greater share of their income in state and local taxes than the state’s wealthiest taxpayers.

• The proposed tax cuts under SB 325 combined with income tax cuts passed since 2013 would result in the top 1 percent of income earners getting a permanent net tax cut of more than $19,000 on average. The middle 20 percent of income earners, by contrast, would get a tax cut on average of $293, while the bottom 20 percent of income earners would get a net tax cut on average of only $51.

• As for more corporate tax cuts included in the tax plan, there is no reason to believe that tax cuts going to big multistate corporations will benefit North Carolina’s economy. Businesses may choose instead to use the money to finance out-of-state investments or distribute these additional dollars in the form of dividends to their shareholders, who mostly live out of state. BTC’s analysis finds that just 18 percent of the corporate income tax rate cut is shared with North Carolina residents. Corporate income tax rate cuts since 2013 has resulted in nearly $900 million in revenue loss for the current fiscal year. More tax cuts in the tax plan would make this annual revenue loss number larger.

Sound research should drive our policymakers to make decisions that benefit the public good, not the powerful few. Understanding who benefits from the plan is important to assessing the right path forward for the state, particularly at a time when the state has pressing needs and unanticipated costs associated with natural disasters, and faces great uncertainty as to what the federal government will continue to fund in North Carolina. Last week’s Senate Finance Committee meeting made clear that sound rigor in the numbers and analysis is lacking, while uninformative rhetoric that sounds good in the Senate’s pursuit of more tax cuts would hamper our state’s ability to meet the needs of communities across the state.