Either way, the stab of a noisy lobby group left of center shows a poor understanding of the state tax system.
Here is the basic criticism: A decrease in the North Carolina income tax rate would “disproportionately benefit the rich.” The poorest 20% of state taxpayers would receive a “shocking zero percent” benefit. Three quarters of the cut would benefit the “richest 20%” of income earners. As a kicker, “the wealthiest group, the top 1%, would see their tax bill drop by nearly $ 16,000”.
Answering this criticism requires some basic understanding of North Carolina’s income tax structure.
First and foremost, we have a flat tax. All taxable income is taxed at 5.25%. Without other deductions or credits, it means a household with an income of $ 10,000 would face a tax burden of $ 525. Households with five times as much income – $ 50,000 – would face a tax liability of $ 2,625 (five times $ 525). Households with an income 10 times higher – $ 100,000 – would face a tax burden of $ 5,250 (10 times $ 525). Those who made 100 times that much – $ 1 million – would owe $ 52,500 (100 times $ 525).
Note that under this simplified version of the North Carolina system, the $ 1 million household owes 100 times as much in taxes as the $ 10,000 household, 20 times as much in taxes as the $ 50,000 and 10 times as much in taxes as the $ 100,000 taxpayer. Those with higher incomes pay a proportionally higher bill to fund the same state government.
Summarize the four taxpayers’ tax bills ($ 60,900) and you will see that the $ 1 million budget covers more than 86% of the bill. The $ 100,000 taxpayer pays less than 9% of the cost, the $ 50,000 taxpayer more than 4%, and the $ 10,000 budget less than 1%.
I mentioned that this is a simplified version of the North Carolina system. Two other key provisions of existing state tax law improve the picture for those at the lower end of the income spectrum.
The first is the standard print. It is sometimes referred to as the zero tax bracket. This is a set amount of money that will be deducted from your income before calculating your tax bill. Under current law, that deduction is $ 10,750 for a single taxpayer and $ 21,500 for a married couple.
If we treat our four households above as married couples, the effects are significant. The $ 10,000 budget now owes no state income tax. (Couples earning up to $ 21,500 owe no income tax at all.) The $ 50,000 household owes $ 1,496. That is 43% less than the invoice without the standard deduction. The $ 100,000 household owes $ 4,121 (a 21% reduction). The $ 1 million taxpayer owes $ 51,371 (2% reduction).
Every household owes less, but the effects are more dramatic for those on lower incomes. Summarize the tax bills again ($ 56,988) and the $ 1 million taxpayer now pays 90% of the bill, with the $ 100,000 taxpayer 7% and the $ 50,000 budget less than 3 % pays.
Add children and the benefits are even greater for those on lower incomes. The other important provision in existing tax law allows married couples with incomes up to $ 120,000 to claim deductions for their children. Deductions can be up to $ 2,500 per child, with benefits tapering as income increases.
We’ve already shown that our $ 10,000 budget doesn’t owe state income tax. Under current law, a couple with two children owe no tax on the first $ 26,500 of income. A family of four with $ 30,000 owes $ 183. Adding two children to our $ 50,000 household creates a tax charge of $ 1,286. For the family of four with $ 100,000, the tax burden is $ 4,016. The $ 1 million family of four sees no difference to a childless couple on the same income level. Both households owe $ 51,371.
All of this is part of the existing state tax system. The proposed changes to the State Senate, now under attack from the political left, would distort the tax burden even more in favor of those with lower incomes.
The flat tax rate would immediately drop from 5.25% to 4.99% and eventually drop back to 3.99%. The standard deduction would increase by $ 2,000 for individuals and $ 4,000 for married couples. The child allowance would increase by $ 500 with each level of the current tier. Married couples earning between $ 120,000 and $ 140,000 can claim a $ 500 per child deduction for the first time.
The zero tax threshold for a family of four would increase from $ 26,500 to $ 31,500. This move would undo the current $ 262 tax burden for families at the new threshold, along with the income tax burden of every family in the state making between $ 26,500 and $ 31,500.
Regardless of complaints from the political left, no one should find it “shocking” that the lowest income taxpayers see no change. You were already exempt from income tax. The Senate would extend this exemption to other taxpayers.
Yes, those with higher incomes would see greater dollar amounts in tax breaks. But that’s because they pay much higher tax bills under the current system. No family of four earning up to $ 31,500 would owe a dime in state income tax under the Senate plan.
For a family slightly above this threshold ($ 35,000), today’s tax burden would drop from $ 446 to $ 139 if the flat rate fell below 4%. That’s a 69% reduction in the family’s state income tax bill.
For our $ 50,000 household, the bill would drop from $ 1,286 to $ 778 (a 40% reduction). The $ 100,000 family bill would drop from $ 4,016 to $ 2,852 (a 29% reduction). For the $ 1 million household, the bill would drop from $ 51,371 to $ 38,882 (a 24% reduction).
Yes, the $ 1 million family would see a bigger tax cut, dollar after dollar. But its relative tax burden would increase compared to those with lower incomes. Under current law, the $ 1 million family earns 28 times the income of the $ 35,000 household and owes 115 times the income tax. Under the Senate plan, the $ 1 million budget would owe 280 times the family’s $ 35,000.
As for the “falling” tax burden on top earners, note that a taxpayer would have to make approximately $ 1.28 million to achieve a tax cut of $ 16,000. Even with the cut, a taxpayer on that income would owe more than $ 50,000. That’s $ 50,000 more than any family of four who make up to $ 31,500. It’s 360 times the $ 35,000 family.
Perhaps critics haven’t taken the time to study the Senate’s tax plan. After examining the facts, their claims to disproportionate benefits are flatter than the flat-rate tax.
Mitch Kokai is the lead political analyst for the John Locke Foundation.