Tax Reform Means Savings to All NC Income Groups
- The average North Carolina household in every income category received a tax cut from the 2013 tax reform.
- In 2015 households earning less than $25,000 will have $79 million in tax savings from the 2013 tax reform. Households earning less than $50,000 will save more than $147 million.
- If one takes into account the full effect of tax changes made since 2011, all the result of conservative legislative action, the lowest income earners will save $157 million in 2015. The savings for all households at the bottom end of North Carolina’s income distribution, those earning less than $50,000, comes to almost $350 million.
- The savings to all lower- and middle-income households in North Carolina earning less than $100,000 a year is more than $682 million.
- The 2011 sales tax cut, opposed by Democrats, resulted in middle- and lower-income families receiving more than twice as much in tax relief as those earning more than $100,000 a year.
- The average household in every income group is seeing its tax burden reduced from both the 2011 sales tax reduction and the 2013 tax reform package
- Considering both 2011 and 2013 tax changes, the average household in both the lowest and highest income categories is receiving a tax cut of about 1 percent of income.
The benefits from these changes more than compensate for any increases in tax payments that are the result of minor expansions of the sales tax base or the elimination of the state’s earned income tax credit (EITC) that were implemented under the law.
Tax reform passed in 2013, and now going into effect in 2014, will lead to a tax cut for the average North Carolina household in every income category. A new study commissioned by the John Locke Foundation and conducted by economists at Suffolk University’s Beacon Hill Institute concludes that, as a result of changes to North Carolina’s tax system implemented by North Carolina’s Republican legislature, not only are the highest income earners getting a tax cut, a conclusion that has not been in dispute, but the lowest income households and all income groups in between are, too. These results buttress projections made by North Carolina’s non-partisan legislative research staff.
By Household Income Group: Who is Saving What?
In 2015, households earning less than $25,000, the lowest income category, will have a total annual tax saving from the 2013 tax reform of $79 million. Those households earning less than $50,000 per year, that is lower- and lower middle-income households combined, will see an annual tax cut beginning in 2015 of more than $147 million. (See Figure 1) These savings result primarily from cuts in income tax rates to 5.75% and a large increase in the standard deduction. The benefits from these changes more than compensate for any increases in tax payments that are the result of minor expansions of the sales tax base or the elimination of the state’s earned income tax credit (EITC) that were implemented under the law.
But this is only part of the story. The Republicans were also responsible for allowing a temporary sales tax increase, implemented by the previous Democrat-controlled legislature, to expire. In 2011, the session after voters granted Republicans control of the General Assembly, Democratic legislators and then Democratic Governor Beverly Perdue favored a continuation of most of the very regressive 5.75% sales-tax rate in effect at the time. Democrats vigorously opposed the full expiration of this increase, so much so that Perdue vetoed the Republican budget that included it. Conservative majorities in both chambers of the legislature overrode Perdue’s veto, and the state sales tax was allowed to fall to 4.75%.
If one takes into account the full effect of tax changes that can be attributed to the new Republican-led legislature, the state’s lowest income earners in 2015 will be saving $157 million. It should be pointed out that about half of that tax savings — more than $78 million that resulted from lowering the sales tax — was opposed by many of those on the left who are now falsely claiming that lower income people have not benefited from recent tax reform. Combined with lower middle-income households (those earning $25,000 to $50,000 annually) the savings for all households at the bottom end of North Carolina’s income scale comes to almost $350 million in 2015. Again, it should be noted that well over half of these cuts emanated from the 2011 changes opposed by then Governor Perdue.
Expanding the income base further, if we tabulate the savings to all lower- and middle-income households in North Carolina earning less than $100,000 a year — that is, excluding upper-middle and high-income households — the total tax savings from changes that can be attributed to actions taken by the Republican led legislature since 2011 is more than $682 million, or slightly less than half the total savings going to all households.
In regards to this comparison, it should be noted that the 2011 sales tax cut resulted in middle- and lower- income families receiving an overall cut that was significantly greater, more than twice as much, as those earning over $100,000 a year. Middle- and lower-income households earning less than $100,000 are receiving more than $400 million annually in tax savings from the 2011 change, while high-income and upper middle-income households are saving $178 million. (See Figure 2) In other words, these tax cuts, by any standard, would have to be considered very progressive. Despite this fact, the liberal establishment in the state opposed these cuts, suggesting that their professed concern for lower income families under the 2013 reforms may not be completely sincere.
The Typical Household
So what does all this mean for typical households in North Carolina? First, the narrative claiming that the recent tax changes in North Carolina reduced the taxes of the well-to-do “on the backs” of lower- and middle-income groups is simply false. The average household in every income group from bottom to top is seeing its tax burden reduced from both the 2011 sales tax reduction and the 2013 tax reform package. As one would expect, for the typical household in each income category, the absolute amount saved goes up as incomes go up. For any given tax cut, those who earn and spend more are always going to save more.
It is interesting, though, to compare households at opposite ends of the income spectrum. (See Figure 3) A typical household in the lowest income group earning about $12,500 a year will have its North Carolina state tax burden reduced in 2015 by $135 with roughly equal amounts of saving coming from the 2011 and the 2013 tax changes. At the opposite end of the spectrum, a household earning $288,000 will see an annual tax saving of $3600 in 2015. In terms of tax dollars saved, this is the widest difference between income groups. But when looked at as a percentage of household income, the tax saving in both categories is about the same: one percent. The savings seen by the average households in the middle-income groups range from about one- half to one percent of income.
Conclusion: What We Are Not Claiming
It is not being claimed that every household in every income group will see its taxes go down as a result of these changes. This would be an extremely unlikely result for any set of tax reforms. Depending on particular circumstances, there are households in every income category that will end up paying more as a result of recent changes. Clearly, someone could construct particular household scenarios that would demonstrate that result. And dishonest politicos could and will use these scenarios to imply that special cases are typical. But in fact, if they were typical, one could not reach the overall conclusion of this study, namely that, in the aggregate, every income group, from the lowest to the highest, will end up with lower bills at the cash register and increased take-home pay. Those positive outcomes are the result of tax changes enacted by conservative legislators who took control of the North Carolina General Assembly in 2011 and continued to enact reforms in 2013.