Tax cuts have allowed Gov. Pat McCrory to boast that he has led an economic recovery in North Carolina and box his opponent into saying whether he would leave the cuts in place if he wins or if he would raise taxes to pay for his promises.
“Are you going to raise individual and corporate taxes again?” McCrory pressed Attorney General Roy Cooper during their first televised debate. “Yes or no?”
In the next debate, moderator David Crabtree of WRAL picked up the inquisition. “Help me understand the math,” Crabtree said, asking Cooper how realistic it is to spend more on education and give the middle class a break. “…You say you can do that without raising taxes?”
“Absolutely,” Cooper replied. “We don’t need to increase taxes. What we need to do is fix some of those taxes that he put on the middle class and small businesses and take some of those taxes off of them, is what we need to do.”
McCrory credits rate reductions and other changes in the tax code, as well as a big reserve, paying off debt and shaving regulations on business, for the resurgent state economy. Cooper says the advantages are going only to the wealthy, and the state needs to reform its priorities to spend more on tuition-free community college, high-skills job training and increased teacher pay.
Whether that will take raising income taxes or expanding sales taxes, or somehow reshuffling the budget in the unlikely event Democrats return to power in the General Assembly, remains a point of dispute.
What McCrory, legislature did
Here’s what happened under the McCrory administration and the Republican legislature over the past nearly four years:
▪ Individual income tax rates were reduced from a three-tiered system to a flat 5.75 percent, dropping to 5.49 percent in January.
▪ Standard deductions in the personal income tax were increased by $2,000 for married couples filing jointly.
▪ The corporate income tax dropped from 6.9 percent to 4 percent, which will drop to 3 percent in January.
▪ The estate tax was repealed.
“Broadly speaking, we tried as a state the last two years to flatten or reduce taxes,” Drew Heath, the governor’s budget director, said in an interview. “What you see is business and individual filers have benefited from that.”
Heath’s office and the legislature’s nonpartisan fiscal research division have calculated the cuts will save taxpayers $4.7 billion over five years.
Why Cooper doesn’t like it
Cooper, other Democrats and advocates for economic parity say the beneficiaries are the top 1 percent of North Carolinians, who have seen their taxes decrease by an average of $15,500 annually. Meanwhile, the middle 20 percent saw a $167 cut and the lowest 20 percent a $10 increase, according to an August report by the N.C. Justice Center, which advocates for the disadvantaged. Besides the wealthy, the tax breaks also went to corporations.
Asked in an interview what the business community tells him it needs, Cooper said CEOs do not name cutting corporate taxes as their first priority.
“The first thing they tell me is to provide the trained workforce who can perform the jobs that I create,” Cooper said. “That is the No. 1 request of CEOs of companies.”
For Cooper, that means making college affordable and more accessible to produce skilled workers who will earn higher wages and help companies succeed.
“That’s why they come to North Carolina; because of the universities and tech centers. That’s why they are here, because of a trained workforce. We have to make that investment across the state. I believe we have lost four years.”
Investment in education can be done without raising taxes by rearranging priorities, according to the attorney general. For instance, by leveraging Pell grants and other federal funds the state could provide free community college tuition for all students, he said. Revenue from an improving national economy will also help, he says.
More importantly, Cooper disputes the McCrory campaign claim that there has been a “Carolina Comeback.”
“Most people don’t feel improvement in the economy,” Cooper said. “Most people are working harder and for less money than they were before the recession. Real wage growth for middle-income families is not occurring.”
Heath disagrees and says the tax changes benefit everyone in the state.
Increasing standard deductions, for instance, disproportionately helps low-income earners, he said. An estimated 75,000 of the lowest-income residents will fall off the income tax rolls altogether because of that change.
Expanding the sales tax provides a less volatile source of revenue and, along with income tax rate reductions and standard deduction increases, benefits taxpayers in all categories, Heath said. A household’s costs associated with the new taxes on repair, maintenance and installation would have to be unusually high to offset overall tax savings, Heath said – an estimated $1,600 in spending on newly taxable services in a year.
While some conservative advocates would like to see the capital gains tax reworked, Heath says the administration thinks it has accomplished what it wants already without additional cuts.
“The numbers show this has largely worked for North Carolina,” he said, citing 300,000 new jobs created since 2013. “We’ve had significant and fast-paced reforms over the last three years.”
What would Cooper do?
That’s all well and good, Cooper says, but if he wins there will be more tax work to do to help people, not corporations. He acknowledges it will take more than his election alone to reverse the GOP agenda of the past nearly six years, since Republicans took over the legislature.
“Immediate tax code changes are going to be difficult with this General Assembly,” he said. “I’d want to stop the giveaways at the top and stop the increases on the middle class. I think now we need to turn our attention to investment in public education, investment in health care, mental health; turn our attention to investment in our people.”
Stopping the scheduled continued tax cuts for corporations is among Cooper’s goals. He has also said the $1.6 billion rainy day fund is too big; asked in a debate if he still holds that view as costs add up from Hurricane Matthew, he said only that he believes the state needs a strong rainy day fund.
Cooper says he would also propose to reinstate the child-care tax credit for working families that was eliminated by the legislature and pay for it with future revenue gains. He would try to restore film tax credits to revive that industry. He would develop a program to help small businesses and entrepreneurs through micro-loans, mentoring and replicating the N.C. Rural Center for urban and suburban small businesses, and make better use of job incentives.
His view is bolstered by the N.C. Budget and Tax Center, part of the Justice Center, which says the state’s economic health is measured by more than the low 4.7 percent unemployment rate. The center recently issued a report disputing the “Carolina Comeback.” Wages have not kept pace with productivity over the past 35 years, it says.
John Hood, chairman of the conservative John Locke Foundation, says it’s a good bet that a Gov. Cooper would try to increase sales taxes, because that’s what Democrats have done in the past. If Cooper is planning on future revenue growth to fund education and infrastructure, Hood says, his goals are the same as McCrory’s; otherwise, he’ll have to raise taxes.
“Under Gov. McCrory, North Carolina has enacted one of the most significant pro-growth state tax reforms in modern American history,” Hood said.
The Tax Foundation, which advocates for tax codes that make states more competitive with each other, this year moved North Carolina from 41st to 11th on its State Business Tax Climate ranking — the biggest gain ever, crediting the recent changes. The state’s corporate income tax rate is now the lowest in the country, it reports.