Debunking NC tax changes and what they mean for public funding and universities

A policy report from the North Carolina Justice Center’s Budget and Tax Center raises questions about the success of North Carolina’s 2013 tax reform and the future of North Carolina funding given the soon-to-be-seen effects of the federal tax reform in December 2017.

The NC Justice Center is a progressive research and advocacy organization. Their mission is "to eliminate poverty in North Carolina by ensuring that every household in the state has access to the resources, services and fair treatment it needs to achieve economic security," according to the organization's website.

Alexandra Sirota, the Budget and Tax Center director, wrote in her brief that the primary focus of the N.C. General Assembly during the next legislative session should be to address upcoming cuts in corporate and personal income tax rates in January 2019. 

Sirota said North Carolina will lose roughly $900 million over a year in revenue from the scheduled taxes, which she said will lead to the state’s budget being out of balance, requiring funding cuts in public health, environmental protections and education. 

“Removing the scheduled tax cuts from statute this session is the first step to ensure that North Carolina can adequately invest in its future, strengthen the economy for the long-term and prepare for likely external shocks to the state’s economic and fiscal health,” she said.

Sirota cited the General Assembly’s Fiscal Research Division’s January revenue memo, where the non-partisan staff agency found that, due to recent tax cuts, it’s possible that final payments on the 2017 tax year from taxpayers will come up short of expectations. 

The memo said the federal tax reform changes will not have a significant, ongoing impact on the state’s revenue but could affect the financial holdings of individuals and could affect final payments in the future.

The federal tax reform in December reduced the corporate tax rate from 35 percent to 21 percent and rearranged personal tax brackets, with a top bracket decreasing from 39.6 percent to 37 percent, among many other limits on deductions. 

Original provisions in the first House of Representatives’ bill included limits on deductions for graduate students’ grants and scholarships, which would have led to those individuals getting a tax increase. These provisions were eventually cut out of the final legislation.

Kathleen Thomas, a tax law professor at the UNC School of Law, said it’s difficult to predict and view how tax cuts impact the economy and economic recovery because the evidence is so mixed.

She said a lot of the future predictions depend on whether or not the state can bring in enough revenue, which is something that was not mentioned when politicians pointed at North Carolina for a model for the federal tax reform.

Thomas said there is definitely a potential for a loss in higher education funding, especially since the federal government is projected to lose $1.5 trillion in revenue, which could come from any sector of the government.

She said students should take away that their state tax cuts are permanent for the time being, but the federal tax cuts are temporary – some provisions expire in 2025, while others expire in 2027 and 2028.

“What should cause everyone concern is – notwithstanding the fact that we might all see our tax bill go down – is this a sustainable long term plan, both at the federal and state level,” Thomas said.

@CBlakeWeaver

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