A 2018 constitutional amendment may haunt NC as it tries to recover from COVID-19
In what now seems like the distant past of 2018, Republican state lawmakers moved to lock in their tax cuts by offering a constitutional amendment lowering the state’s income tax cap from 10 percent to 7 percent.
Opponents said the lower limit would restrict the legislature’s ability to respond in an economic crisis, but voters, as they are wont to do when offered a promise of limited taxes, approved the lower cap with 57 percent of the vote.
During the Senate debate on the amendment, Sen. Floyd McKissick, D-Durham, said the financial crisis of 2008 showed the need for flexibility on taxes when the state suddenly loses revenue. “We should be about preserving our options,” McKissick said, rather than “put financial handcuffs on ourselves.”
Unmoved by the memory of the Great Recession, the Republican majority put the tax cap amendment before voters. And now an economic crisis even deeper than the Great Recession has come. The unemployment rate could rise to double digits, many small businesses could fail and the state could face a revenue shortfall of $2.5 billion.
It’s notable that Senate Republicans approved a proposed constitutional amendment capping the income tax rate at 5.5 percent before the House raised it to 7 percent. Sen. Tommy Tucker, then co-chair of the Senate Finance Committee, said House Republicans had raised the cap too generously.
“I believe that 5.5 percent is where we could have had the opportunity once and for all to implement fiscal discipline,” he said. “We don’t have a taxing problem here in North Carolina, we have a spending problem.”
Now North Carolina has a taxing problem. Before the Republican-led General Assembly “reformed” the tax code, the state had a progressive income tax structure with the top tier at 7.75 percent. Now it has a 5.25 percent flat income tax and a lower ceiling for income taxes. The corporate income tax, which is also capped by the amendment, has been cut from 6.9 percent to 2.5 percent.
Of course, income-tax limits are not a concern to the legislature’s Republican majority, even amid the COVID-19 crisis. Preventing big personal and corporate income hikes – even those compelled by a steep revenue shortfall – was the idea behind the amendment. But the fiscal handcuffs McKissick warned about will be a hindrance should Democrats regain control of the legislature in November and set about looking for ways to meet the state’s balanced budget requirement without deep cuts in services.
North Carolina’s lower income-tax cap – on top of eliminating the progressive income-tax rates – came at a time when many states were moving to increase taxes on the wealthy. Some, responding to the top 1 percent claiming a larger percentage of the nation’s wealth, have added tax surcharges on very high earners. New York charges 8.82 percent on taxable income higher than $1 million. California charges 13..3 percent.
That won’t be an option for North Carolina as it tries to rebound from this economic crisis. As the state won’t be able to ask, even temporarily, for more than 7 percent from the profitable corporations and wealthy individuals who may be most able to pay. Instead it may raise or extend regressive sales taxes and fees which hit the hardest those who may have lost the most in the COVID-19 meltdown.
This is another example of what Republicans lawmakers hail as restraint resulting in recklessness. A tax cap may have seemed harmless when the economy was strong and unemployment was at 4 percent. But in an emergency – and this is a five-alarm one – the lower cap will restrict the state’s ability to respond in a manner that is not only effective and fair, but essential.
This story was originally published April 16, 2020 at 12:00 AM with the headline "A 2018 constitutional amendment may haunt NC as it tries to recover from COVID-19."