January 15, 2014
RALEIGH — Taxpayers in every income category will save tens of millions of dollars because of state tax reforms enacted in North Carolina in 2013. Combining 2013 reforms with a 2011 sales-tax rate reduction pushed by the Republican-led General Assembly, lower- and middle-income households will enjoy annual savings of $682 million, according to a new John Locke Foundation Spotlight report.
“It’s simply false to claim that recent tax changes in North Carolina are allowing the well-to-do to get their taxes reduced ‘on the backs of’ lower- and middle-income groups,” said Dr. Roy Cordato, JLF Vice President for Research and Resident Scholar. “The average household in every income group from top to bottom is seeing its tax burden reduced from the 2013 tax reform package. Just as important, this new round of tax relief follows a 2011 state sales-tax decline that overwhelmingly favored lower- and middle-income taxpayers.”
Cordato’s comments follow his review of a new study conducted for JLF by economists at Suffolk University’s Beacon Hill Institute. The Beacon Hill team examined impacts for all income groups of Republican-sponsored tax changes adopted since 2011.
“Much of today’s political debate focuses solely on the latest tax reform legislation, as if lawmakers made their decisions about those reforms in a vacuum,” Cordato said. “But that makes no sense. The tax reform law adopted in 2013 followed Republicans’ important decision in 2011 to reject Democrats’ efforts to keep a higher state sales tax rate in place. Taxpayers benefit greatly from both of these decisions from the Republican-led General Assembly.”
In 2015 households earning less than $25,000 a year, the lowest income category, will save a total of $79 million thanks to the 2013 legislation, Cordato said. Households earning less than $50,000 will see annual tax savings of $147 million.
“These savings result primarily from a state income tax rate cut to 5.75 percent and a large increase in the standard deduction,” Cordato said. “Benefits from these changes more than compensate for any increases in tax payments resulting from other pieces of the tax reform package.”
Gains for these low- and middle-income taxpayers are much greater when Beacon Hill Institute economists add the 2011 sales-tax decline into their calculations. “For the lowest-income earners, total tax savings in 2015 will be $157 million,” Cordato said. “Total tax savings climb to almost $350 million for households earning up to $50,000.”
Many of the most vocal critics of the 2013 tax reform legislation seemed less concerned about tax relief for low-income families in 2011, Cordato said. “Many of those on the left who claim falsely that lower-income people will not benefit from the latest tax reform are the same people who opposed the sales-tax decline two years earlier,” he said. “Because Republicans in the General Assembly rejected Democratic efforts to extend a higher sales-tax rate, households making less than $50,000 a year will enjoy annual tax savings of more than $200 million.”
North Carolina households earning less than $100,000 a year, meaning all but upper-middle and high-income households, should see annual tax savings of $682 million thanks to decisions the Republican-led General Assembly has made since 2011, Cordato said. “That’s slightly less than half of the total savings going to all households.”
“It’s important to note that the 2011 sales-tax decline resulted in middle- and lower-income families receiving an overall cut that was significantly greater, over twice as much, as those households earning more than $100,000 a year,” Cordato added. “Households earning less than $100,000 see tax savings of $400 million, while those earning $100,000 or more save $178 million.”
By any standard, that 2011 sales-tax rate reduction was “very progressive,” Cordato said. “Despite this fact, this decline was vigorously opposed by then-Gov. Beverly Perdue, Democratic lawmakers, and the liberal establishment in this state,” he said. “This suggests that this same establishment’s current concern about the impact of 2013 reforms on lower-income families might not be completely sincere.”
Cordato notes with interest the amount of tax relief expected for households at opposite ends of the income spectrum.
“A typical household in the lowest-income group earning about $12,500 a year will have its North Carolina state tax burden reduced in 2015 by $135,” he said. “A household earning $288,000 will see its tax burden reduced by $3,600. In terms of percentage of household income, tax saving for both households is the same: 1 percent.”
The report does not claim that every household in every income group will see its taxes go down as a result of these changes. “This would be an extremely unlikely result for any set of tax reforms,” Cordato said. “Depending on particular circumstances, there are households in every income category that will end up paying more as a result of recent changes. Clearly, someone could construct particular household scenarios that would demonstrate that result. And dishonest politicos could and will use these scenarios to imply that special cases are typical.”
But the overall findings are clear, Cordato said. “In the aggregate, every income group, from the lowest to highest, will end up with lower bills at the cash register and increases in take-home pay,” he said. “Those positive changes result from tax changes enacted by conservative legislators who took control of the North Carolina General Assembly in 2011 and continued to enact reforms in 2013.”
Dr. Roy Cordato’s Spotlight report, “Tax Cuts For All: Tax Reform Means Savings to All N.C. Income Groups,” is available at the JLF website. For more information, please contact Cordato at (919) 828-3876 or [email protected]. To arrange an interview, contact Mitch Kokai at (919) 306-8736 or [email protected].