House’s income tax hike could cost 2,800 private-sector N.C. jobs

June 25, 2009

Click here to view and here to listen to Dr. Roy Cordato discussing this press release.

RALEIGH — Two new personal income tax brackets included in the N.C. House budget could “destroy” more than 2,800 private-sector jobs in the state, according to a report (pdf link) from Boston-based economists who analyzed the tax plan.

“Since the federal government considers any loss of 50 jobs to be a ‘mass layoff,’ these income tax increases could produce the same effect as 56 mass layoffs in North Carolina,” said Dr. Roy Cordato, John Locke Foundation Vice President for Research and Resident Scholar. “The state already has the nation’s No. 7 unemployment rate — a record-breaking 11.1 percent — and it would border on insanity for lawmakers to consider a tax increase that would do this much damage to the state’s slumping economy.”

In addition to the lost private-sector jobs, the income tax increases would reduce North Carolinians’ real after-tax income by $101 million, cut the Gross State Product by almost $36 million, and cost local governments $12 million in tax revenue. That’s according to the analysis from economists at the Beacon Hill Institute, the research arm of the economics department at Boston’s Suffolk University.

“In addition to these negative impacts, these tax increases would likely bring in about $40 million less to the state government coffers than the House anticipated,” Cordato said. “Once you look beyond the House budget’s projections, you see that these income tax increases would do much more harm than good for the state.”

The two new tax brackets make up just one piece of the House’s package of proposed tax hikes. An individual taxpayer earning $120,000 and a married couple earning more than $200,000 would see their marginal N.C. personal income tax rate climb from 7.75 percent to 8.25 percent. The rate would climb to 8.5 percent for individuals with incomes of $300,000 and married couples filing jointly with incomes higher than $500,000.

House budget writers expected the new rates to generate $256.7 million in the new budget year, one-third of the $783.6 million in new taxes the House proposes. House leaders are now negotiating a final budget deal with the Senate, which included no income tax increases in its plans. Senate leaders have signaled a willingness to accept more than $900 million in new taxes in the next year, but they have rejected publicly any suggestion of raising income tax rates.

“While the House has set its sights on raising $256 million from these income taxes, the Beacon Hill Institute analysis suggests the state would be much more likely to collect about $216 million,” Cordato said. “That number does not include the negative tax impact for local governments. Since high-income earners would have less money to spend, the income tax hike would cost local governments an estimated $12 million in tax revenue in the next year.”

Taxpayers would likely foot the bill for more government workers as well, according to the Beacon Hill economists. “While the income tax increases would kill 2,817 private-sector jobs, the Beacon Hill Institute research suggests government employment would grow by 1,644 jobs,” Cordato said. “The net loss would be 1,173 jobs, but the real impact is worse since struggling taxpayers must fund all of those new government jobs.”

The personal income tax increase “has the fundamental effect of reducing disposable (after-tax) income, which leads to lower consumption,” according to the Beacon Hill report. “To accommodate the drop in demand the private sector would contract its production capabilities, leading to a decrease in jobs and investment.”

An income tax increase “serves as a deterrent to economic activity,” the report adds. “This research also reminds us that we need to look at more than just the immediate impact of a tax increase on government revenue,” Cordato said. “That’s called a static analysis. It exaggerates the actual revenue gain and ignores lost economic activity connected to the tax increase.”

A “dynamic” analysis factoring in all likely impacts paints a different picture, Cordato said. “The private sector would shed jobs, North Carolinians would have less after-tax money to spend, the state’s economy would take a hit, and local governments would lose revenue,” he said. “Now is not the time to slam the economy with these additional burdens.”

For more information, please contact Roy Cordato at (919) 828-3876 or [email protected]. To arrange an interview, contact Mitch Kokai at (919) 306-8736 or [email protected].