RALEIGH — The income gap that’s been growing for years increasingly is undermining public treasuries in North Carolina and other states, a new report by the investment rating agency Standard & Poor’s says.
North Carolina is among the 10 states most reliant on income tax revenues, the S&P report released Monday said. The increasing flow of wealth to top earners is likely to force policy-makers into a choice between raising tax rates on the rich or cutting spending, the report said.
The report builds on an analysis the firm released last month about how inequality is hampering the U.S. rebound from the Great Recession. That report advised against politicians taxing the rich to narrow the gap and instead increasing education access to help individuals compete for higher wages.
But the growing gap between rich and poor also has implications for how states will be able to afford education, medical care and road maintenance in the future, the study said.
North Carolina’s annual tax revenues in the 2000s grew on average by about half the rate of the 1990s and grew by only a slightly faster pace since recession-scarred 2009, the report said. North Carolina’s tax revenues between 2009 and 2011 grew more slowly than its peer group of other states heavily dependent on income tax revenues, the study found.
Gov. Pat McCrory and fellow Republicans in the General Assembly came into office in 2013 determined to cut taxes. The final package delivered the biggest bang for those with the largest incomes, while ending a measure that boosted the income of the state’s poorest workers.
The goal is that cutting taxes stimulates economic activity and jobs.
By contrast, California has increased its top tax rates on the richest residents and accelerated its tax collections since 2009, the report said.
North Carolina’s choise
North Carolina had a three-tier income tax system for decades in which the highest earners paid a higher tax rate than the middle class and working poor. The Legislature last year converted that into a flat rate paid of 5.8 percent by all taxpayers. Those at the top end of the income scale who had paid the highest 7.75 percent rate saw their total income tax burden reduced by a quarter. Low-income taxpayers paying 6 percent got a more modest cut.
State leaders also allowed the expiration of the state’s Earned Income Tax Credit, which transferred money to poor families. Lawmakers also eliminated a program that allowed families a deduction on pre-tax income into a college savings account.
The Legislature’s Fiscal Research Division estimated last year that a married couple with two children earning $20,000 a year that received a $222 EITC rebate in 2013 would instead have to pay $40 this year. In comparison, a married couple with two children making $250,000 will get a $2,318 tax cut in 2014, according to the analysis.
The 1990s in perspective
North Carolina’s state government rode a wave of economic growth in the 1990s and registered a $1.4 billion budget surplus in 1998.
But the state’s revenues included a special state tax on stocks, bonds and other investments issued by out-of-state corporations that the U.S. Supreme Court ruled was unconstitutional. Courts also required refunds for state and federal retirees who showed their pensions had been wrongly taxed by North Carolina.
The state was forced to return $1.2 billion to hundreds of thousands of taxpayers around the turn of the millennium and soon after North Carolina was in a budget crisis.
How much are we talking about?
According to the U.S. Census Bureau, one in five North Carolina residents earned about $10,200 or less in 2012. Forty percent earned less than $27,000 that year. Income for the top 20 percent in the state was more than $155,000. The top 5 percent brought home at least $272,000.