RALEIGH, N.C. (AP) — North Carolina’s Republican senators are trying to lower the state’s cap on income tax despite warnings from the office of the state treasurer that the change could damage the state’s coveted bond rating and limit its ability to rebound during economic downturn.
The Senate Finance Committee passed a proposal Tuesday to prevent the personal income tax from rising any higher when it drops to 5.499 percent in 2017.
Republicans say the proposed constitutional amendment to cap the personal income tax at 5.5 percent is another step toward tax overhauls designed to lower income tax rates and place greater reliance on sales taxes.
A constitutional amendment requires three-fifths approval of each chamber of the General Assembly to submit the proposal to voters on the general election ballot this November. The current constitutional cap on income tax is 10 percent.
“What this amendment will help us do is continue down the same path that we are on that will continue to make North Carolina the leader in tax reform in the nation,” said Sen. Bill Rabon, R-Brunswick, one of the bill’s sponsors. “And I think there’s a very hard argument to say that it does anything else.”
The state treasurer’s office disagrees.
Representatives for the office asked to speak with the committee but were unable before a vote was taken. In a brief to the committee, Treasurer Janet Cowell, a Democrat, wrote that restrictive constitutional limits are viewed as a disadvantage by rating agencies because they limit flexibility of the state to adjust to economic fluctuation.
North Carolina holds an AAA bond rating — the highest possible — from all three major bond-rating agencies.
Deputy Treasurer Greg Gaskins said a constitutional amendment seems unnecessary because the income tax is already scheduled to fall below the proposed cap.
“The General Assembly has already accomplished their purpose; doing this adds nothing more,” Gaskins said. “The only thing it does do is potentially raises a future issue is whether or not you can be as flexible as you need to meet the needs of the citizen.”
Sen. Floyd McKissick, D-Durham, said he feared the state would not be able to respond appropriately should it need to adjust taxes during budget shortfalls like the Democratic-controlled General Assembly faced in 2009.
“Why would we want to put our financial handcuffs on when we don’t have to do so?” McKissick said.
The bill’s supporters said the current revenue is fortified with GOP-driven budget cuts and a strong rainy day fund.
In 2014 North Carolina transitioned from a three-tiered individual income tax system to a lower flat income tax rate.
Alexandra Sirota, director for liberal-leaning North Carolina Justice Center’s Budget & Tax Center, said she fears a “blind path” to zero income tax ignores the needs of lower- and middle-class communities who would receive fewer benefits but be affected by higher sales taxes, property taxes and court fees.
“By capping the income tax at this low and very arbitrary rate, we are locking in a tax code that benefits the wealthy and the powerful,” Sirota said.