North Carolina Tax Reform

The North Carolina Senate today unveiled a revised tax reform strategy that moved away from a large shift toward sales taxes (bill summary, bill, fiscal note). I need to read through this, especially the fiscal note more carefully, but the big points are moving to repeal the corporate income tax by 2018 , and having a flat personal income tax of 5.4% (with the first $15,000 having zero rate). This is a fairly substantial net tax cut, which is the main point of the proponents–they say it will spur economic growth and jobs–and since something a lot like this will pass, I hope they are correct. Here is a screen shot of the statewide part of the fiscal note (local impacts are relatively smaller, not shown here). Note, numbers in parentheses are reductions of money from a source (tax cuts); regular numbers are tax increases.

ScreenHunter_01 Jun. 11 17.47

Who loses in this? The biggest loser are the people who buy for electricity/natural gas, but next on the list are hospitals, through the capping of the nonprofit refunds of sales tax on items they purchase. This results in tax increases of the following amounts to all non-profits, but most of this money will come from large 501-c-3 hospitals/health systems like Duke, WakeMed, Vidant, etc. simply because they are massive organizations that now get large refunds which function as direct subsidies of them by the State. Aggregate amounts of increase:

  • $59 Million in FY 14-15
  • $139.5 Million in FY 15-16
  • $235 Million in FY 16-17
  • $295.5 Million in FY 17-18

The other big loser group is college kids buying (already expensive) food in on campus cafeterias, which is now exempt from any tax (raises ~$35 Million per year over the window of the fiscal note).

A few thoughts focusing on the make up of what is brought in by the tax reform and not commenting on the level, which is the key tax reform question.

  • This is in a better direction than large scale additions of items to the sales tax in terms of regressivity (earlier plan more regressive)
  • If you added a refundable Earned Income Tax Credit (EITC) and the Medicaid expansion to this, I might even say I was for this. As I have written, if we can boost economic growth and jobs and doing so requires some changes that might not be progressive favorites, you can look to the spending as well as the tax side to assess overall relative fairness/regressivity. The Medicaid expansion would be the big enchilada here.
  • If the hospitals don’t come out full guns blazing on this (before they were going to lose with lots of others, like the realtors, now just them), then that reinforces the idea that we will undertake the Medicaid expansion next year after Republicans don’t have to worry about primary challenges and probably more importantly, Speaker Tillis, Sen. Berger etc have settled the U.S. Senate primary. If not, we are saying to the hospitals in the state: (1) no on Medicaid expansion; but (2) keep providing care to the uninsured and (3) pay more in taxes. I keep waiting for them to all join together and play the Diaz v. North Carolina card and put the Governor’s office phone on the forms telling folks they aren’t doing non emergent care in the ER sans a charge. If they remain quiet, it is more evidence that they think the Medicaid expansion is coming, a year later.
  • I should note that I have called for an end to the federal corporate income tax, and making dividends and capital gains normal income. Corporate taxes are notorious for raising relatively small proportions of total revenue at both the federal and state level, and I believe federal reform along the lines I note would be the simplest way to address income inequality around. Conservatives also gripe and complain about them all the time and say they are high no matter how low they are, and you cannot go lower than zero. If we are going to greatly decrease the corporate tax, might as well eradicate it.

About Don Taylor
Professor of Public Policy at Duke University (with appointments in Business, Nursing, Community and Family Medicine, and the Duke Clinical Research Institute). I am one of the founding faculty of the Margolis Center for Health Policy, and currently serve as Chair of Duke's University Priorities Committee (UPC). My research focuses on improving care for persons who are dying, and I am co-PI of a CMMI award in Community Based Palliative Care. I teach both undergrads and grad students at Duke. On twitter @donaldhtaylorjr

3 Responses to North Carolina Tax Reform

  1. Pingback: Key Difference Senate v House Tax Reform hints at Medicaid expansion | freeforall

  2. Thanks for this analysis. It never occurred to me that they would tax utilities. But as you say an expanded EIC and Medicaid could be a good trade off. However it does seem to me that middle bracket families will be squeezed between higher consumption tax rates and no real preferential relief (EIC, healthcare subsidies, etc.)

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