The Senate Finance Committee took up a measure Wednesday that would put a constitutional amendment before the voters in 2018 to cap the state income tax at 5.5 percent, bringing it down from the current cap of 10 percent.
The bill, SB75, was introduced last year but failed to gain traction during the Short Session.
The one-page bill, in its current form, would simply ask voters in November 2018 if they wanted a constitutional amendment limiting the state income tax to a maximum of 5.5 percent.
Currently the tax sits at 5.499 percent, but under the law it could be almost doubled before hitting the 10 percent cap.
Sen. Tommy Tucker (R-Union) introduced the bill in the Senate and also discussed it in committee Wednesday afternoon.
“This bill has been out there for some time. It basically is an act to amend the North Carolina Constitution to cap the personal income tax rate at 5.5 percent. It goes in the next election cycle before the people to vote for or against it,” he said. “It gives them the opportunity to make that decision rather than us. I’ll be glad to entertain any questions.”
Sen. Joyce Waddell (D-Mecklenburg) questioned Tucker on the bill on whether this change would prevent lawmakers from increasing the income tax rate ever.
“We’ve visited this once before and I still want to know about the income that comes into this state and SB75,” she said. “Is there any way that Senate bill would amend the constitution to prevent future lawmakers from ever increasing the state income tax rate?”
Tucker responded that it would require another constitutional amendment, voted in by the people, to overcome the cap, but it did not leave the state unable to raise additional funds if needed in an emergency through other means.
“I think it would probably require a constitutional amendment to be able to raise that, but you have other opportunities to raise income in emergencies or recessions,” he said. “It does not, as has been stated, hog tie, hand tie or handcuff any future legislature. They can always take other means to raise taxes in an emergency if they need to.”
Waddell questioned Tucker over whether the change would have devastating effects in the state but Tucker said with the rate currently at 5.499 percent and the safeguards in place with the rainy day fund, he believes there is no reason it would.
“If you have a shortfall, if you have a recession, if you have an emergency you can always raise the sales tax a penny and you can get a billion dollars from that,” he said. “That income is immediate when it is coming in rather than waiting a year on personal income tax. This is consistent with what we have done in the past. Five-point-five percent is a good number. [The rate is] 5.499 percent now; 5.5 percent would be adequate for moving forward for the personal income tax.”
Sen. Floyd McKissick (D-Durham) made a statement against the bill during the committee meeting.
“I guess my concern about this bill, which I have articulated before, is that it does indeed put financial handcuffs on future legislators,” he said. “Constitutionally you would be pretty much limited — well, you would be limited absolutely to 5.5 percent — and if we went through a recession, like we did back in 2008, 2009, we sat there preparing a budget thinking there would be 3.5-4 percent revenue growth and we ended up with about a 15 percent revenue decrease. We were lucky, Washington helped rescue us.
“We don’t know what would happen in Washington under similar circumstances in the future. I mean we might not see a Congress willing to pump $6 billion into North Carolina’s economy. We don’t know what we would have to backfill that hole. Before we utilized sales tax, as well as increasing the surcharge on the income tax, and that in combination, was a wise decision. That in combination was designed to get us out of a hole, in addition to money from Washington.
“I don’t know what’s going to happen in the future, I’m not a prognosticator, nor do I have a crystal ball, but I do know that if it is limited to 5.5 percent and if we went through something like we did back in 2009 then we could see our sales tax end up in double digits, really quickly, and these sales taxes are regressive. Low- and moderate-income people pay them disproportionately, whereas [with] a progressive income tax, high-income earners are going to be [paying] a higher percentage of their income. So due to that factor I cannot support it and Sen. Tucker knows of my concerns. We have a great relationship but he knows on this bill we are going to be 180 degrees apart.”
Committee Chair Sen. Jerry Tillman (R-Moore) responded to McKissick saying that the reason the state was in such poor position to handle the recession was due to the management of the state under Democratic leadership.
“Sen. McKissick, there were many reasons why you weren’t able to weather that recession,” he said. “You were broke when it started, you went year after year spending … when you were having very unbalanced budgets, although they might have balanced on paper they were structurally deficient and to be broke and a recession hit you, you put on a billion sales tax that you all said was temporary and we had to stop that and make it not temporary anymore.
“You never would have done that, you would still be taking that billion out of people’s pay checks. We’ve got a rainy day fund that’s healthy, we’re going to make it healthier, we’re going to have a backup fund. The Medicaid fund now has money in it instead of being broke, so there are ways to meet recessions, but you’ve got to be prepared for them. You all weren’t.”
McKissick said that the sales tax increase expired on its own, to which Tillman responded that it was Republicans who put the expiration day on the tax.
“It never expired until we expired it. I happened to be here,” he said.
Following Tillman’s and McKissick’s exchange, Sen. Andy Wells (R-Alexander) made a statement on the bill regarding whether the bill lays restraints on a future General Assembly.
“I just wanted to point out my understanding of this bill related to what Sen. McKissick just said, and staff can correct me if I am wrong, but as I understand this bill we the General Assembly are not putting any constraints on future general assemblies,” he said. “We are asking the voters if they want to put constraints on future General Assemblies. And I think asking the voters is a good idea as a member of the General Assembly and as a voter I think it is probably a good idea to put constraints on future General Assemblies.”
Following Wells’ comments, Sen. Ralph Hise (R-Madison) commented on McKissick’s point that about raising the income tax in a recession, saying, “I cannot for the life of me fathom any understanding of economics that finds it wise when you hit a recession to immediately increase the income tax burden on the reduced amount that everyone in the state is seeing. I don’t know where you would see a return on investment on that anywhere near your projections and that just creates a hole for the next year and a hole for the following year.”
Following Hise’s comments, the bill went to a voice vote, where it was approved, then sent to the Rules Committee.