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Open Letter to North Carolina General Assembly Regarding Budget

by Clark Packard / /

Dear Members of the North Carolina General Assembly Conference Committee:

On behalf of the members of National Taxpayers Union (NTU) in North Carolina, I submit the following comments on North Carolina’s two-year budget plan, which is being debated in conference committee. As with all state budget proposals, neither the House nor Senate plan is perfect, but there are positive ideas in both.

If enacted, the Senate’s budget would cut the individual income tax rate by one quarter percent – from 5.75 percent to 5.5 percent – over the next year. In addition, it would increase the standard deduction from $7,500 to $9,250 over the next five years. The franchise tax rate would decline from .15 percent to .1 percent. Likewise, the corporate income tax rate would drop from 5 percent to 3 percent over the next two years. Finally, the plan broadens the sales tax base by eliminating certain industry or item-specific exemptions, including veterinary services, and modular home purchases. Building off the success of the Tar Heel State’s 2013 tax reform efforts, these proposals would save taxpayers approximately $1.9 billion over the next five years and go a long way toward enhancing the business climate in the state.

Another positive development is the Senate’s proposed phase out of North Carolina’s Certificate of Need (CON) program. Though initially devised to control health care costs, CON laws serve as barriers to entry for medical providers by restricting access to their services. This cartel-like arrangement benefits well-connected health care providers and hospitals at the expense of patients and new innovators.  Budget Conferees should follow the Senate’s lead and eliminate the CON boondoggle.

Though these are all positive steps, both the House and Senate budgets contain some troubling provisions. Specifically, the House budget calls for an additional $58 million in Job Development Investment Grants (JDIGs). Meanwhile, the Senate’s budget contains $5 million extra in JDIGs.Though GovernorMcCrory is asking the General Assembly for additional JDIG capacity, House and Senate conferees should reject the request. The reason is simple: JDIGs are corporate welfare that benefit politically connected companies and harm smaller businesses and taxpayers. According to a recent study by the John Locke Foundation, between 2007 and 2014, North Carolina awarded 93 JDIGs totaling more than $550 million. These awards crowd out private sector growth by effectively raising the tax pressure on other companies and individuals.

Likewise, there is disagreement between the House and Senate over the size of film tax credits. The Senate budget contains $10 million each year for the next two years in such credits, while the House budget provides four times that amount. A 2013 memorandum issued by the North Carolina Legislative Services Office detailed the impact of the state’s $30.3 million film credits that were claimed for the 2011 tax year. That memorandum duly notes that  “[the film credit] likely attracted 55 to 75 new jobs in North Carolina in 2011.” Conversely, the memorandum concluded, “[the film credit] created 290-350 fewer jobs than would have been created through an across-the-board tax reduction of the same magnitude.”

Finally, the Senate budget contains a detrimental plan to revampthe sales tax revenue distribution scheme. According to the nonpartisan Tax Foundation “the current system allocates locally collected taxes back to the counties mostly in proportion to the taxable sales of each county.” The proposal in the Senate budget would change the current formula and increase sales tax allocations in proportion to the number of residents in each county. At the same time, the proposal would grant counties additional authority to pressure citizens with referendums on local option sales taxes. This arrangement actually benefits rural counties at the expense of more densely populated areas.

The tax cut proposals, coupled with the elimination of CON provisions, would move North Carolina in a decidedly positive direction. At the same time, inclusion of additional JDIGs or a convoluted sales tax distribution system would be steps backward for Tar Heel taxpayers. 

Sincerely,

Clark Packard
Policy and Government Affairs Manager