It’s budget season at the state legislature, which means it’s also tax cut season.
Just about every year since Republicans took control of the General Assembly in 2011, each budget has featured a tax cut. The debate is a re-run every year: Republicans argue that cutting income taxes for businesses and individual taxpayers will spur economic growth, while Democrats say the changes will rob the state of much-needed funding for education and other priorities.
This year, though, Democrats will actually play a role in shaping the final changes in tax cut laws. The GOP’s proposed tax cuts are being rolled into the state budget bill, which Democratic Gov. Roy Cooper is expected to veto.
That move will kick off negotiations between the governor and the legislature to find a compromise, and tax cuts will be one of the bargaining chips on the table. Cooper has made it clear that his top priority is a budget that expands Medicaid.
So while he’s opposed previous income tax cuts, it’s possible he could agree to some form of tax cut if Republicans grudgingly allow for Medicaid expansion.
The preferred GOP tax cut package benefits the business community far more than the average personal income taxpayer. The marquee provision aims to phase out the franchise tax, which is a complicated tax on corporations that amounts to a double property tax: Corporations pay a city/county property tax on their assets, and then the state taxes them based on the value of those same assets.
Republicans argue that the tax discourages businesses from locating here. But opponents of the change fear the state can’t afford the $240 million drop in projected revenue in the change.
Corporations with a lot of assets in North Carolina are ultimately the biggest beneficiaries of this year’s proposed tax cut package. Based on the change in revenue involved, the franchise tax cut amounts to 80 percent of the tax cuts proposed.
The average personal income taxpayer would get a much smaller boost, and some could even end up paying more taxes under the proposal. As an example, take a married couple with a household income of $80,000 per year. Their current state tax bill is $3,150, and with the proposed increase in the standard deduction, their bill would drop to $3,110.
Essentially, your state lawmakers want to give you a free dinner out at a reasonably priced restaurant. And the roughly $88 million in revenue that the state is giving back with the standard deduction increase would be offset by changes in internet sales tax collections.
The proposal would close a loophole in internet sales tax collections. While major internet retailers are already changing North Carolina sales taxes, some small out-of-state businesses using “marketplace facilitator” websites like eBay aren’t. It’s technically the responsibility of the North Carolina buyer to pay the sales tax later, but most people don’t.
Closing the loophole would level the retail playing field and would generate $140 million in additional sales tax revenue coming from the average online shopper. So if you buy a lot of stuff online, that $40-ish personal income tax break will go right back to the government in the form of sales taxes.
Ultimately, this year’s tax package is primarily a business tax cut. It’s the sort of thing Cooper would almost certainly veto as a standalone bill, but putting it in the budget makes the calculus more complicated. Could Cooper support it in exchange for Medicaid expansion? Could he redirect the tax cuts toward individual income taxes? Or would cuts take too much money away from his other policy initiatives?
Budget negotiations could drag on for months, so we won’t get answers anytime soon. In the meantime, legislators from both parties should study the economic impact of the franchise tax more closely: Would more businesses truly come to North Carolina if we cut it? That should be the key question as the debates rage on.