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Paul T. O’Connor: State tax cap wouldn’t prevent future increases

By Paul T. O’Connor

RALEIGH – It should come as no surprise to anyone that things are not always what they seem in politics.

A state Senate-passed bill calling for a constitutional amendment to cap the personal income tax is one such thing. Should it pass the House, a hot debate of benefits and consequences would certainly precede a November 2018 referendum.

Unfortunately, the promises and consequences are likely to be exaggerated.

On its face, the amendment would appear to promise, “Your taxes won’t be going up.” But that is not necessarily the case. Nor is it correct to say, “Your state taxes won’t be going up.”

Define it further to say, “Your state income taxes won’t be going up,” and you’re still not right.

Here’s what it means: Your state income tax rate will not go above 5.5 percent. It is 5.49 percent now. That’s all.

With this amendment, your taxes, specifically your state taxes, certainly can go up. A future legislature might not raise the personal income tax rate, but it could raise the sales tax or other state taxes. Or it can apply the sales tax to more transactions. In the major tax overhaul of 2013, for example, legislators applied the sales tax to entertainment tickets. Anyone who bought movie or sports tickets since then paid higher taxes.

Even if this amendment were to pass, your state income taxes could rise. Future legislators could remove or reduce current deductions, thus raising the amount of your income applicable to the 5.49 percent tax rate. Several years ago, the legislature limited the mortgage deduction, for example.

While the amendment is restricted to the state income tax, it can lead to higher local taxes. State legislators regularly shift mandates onto local governments and put county commissions in the position of having to increase property taxes. Or legislators cut services that commissioners then pay for with county funds.

Now, to be bi-polar in my disdain for political appearances, the most obvious negative consequence of this amendment, as opponents will most likely proclaim next year, is also not necessarily so.

Opponents will argue that the amendment will cause the state to run short, or out, of money. But that’s not so for all of the reasons cited above. A future legislature looking to increase school funding would be barred from raising the income tax rate, but it could raise taxes in all of the other methods just mentioned.

Opponents will almost certainly argue that income tax cap will tie the state’s hands in time of economic recession. No, it won’t do that. It will simply limit the legislature’s flexibility in those situations, and that is a bad thing. But, honestly, who is going to vote against this amendment next November because it limits legislative flexibility?

And, related to the next recession, keep in mind that the state’s Rainy Day Fund, basically its savings account, is healthier than ever and new state law mandates future contributions. That kind of a reserve reduces the likelihood that a normal recession will create a dire need for a big tax increase, especially if the legislature remains so strongly conservative.

Despite my skepticism regarding its bottom-line consequences, the amendment does have relevance in a political sense. If the amendment is on the ballot, it will spark a debate that allows Republicans to boast of having lowered tax rates and to warn that Democrats want to raise them.  That could be a good tool for turnout in a year when most pundits expect the Democratic base to be more energized than that of the Republicans.

Paul T. O’Connor has covered state government for 39 years.

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