The following is the full text of a letter written by Paul Stam to several members of the North Carolina General Assembly. The letter was addressed to State Representatives Donny Lambeth, Dean Arp, Larry Strickland, Kyle Hall, Erin Paré, Hugh Blackwell, and William Brisson, as well as State Senators Brent Jackson, Ralph Hise, and Michael Lee. It addresses several important topics currently under consideration by the legislature and is shared here in full for public awareness and transparency.
Personal Income Tax
John Hood wrote a wonderful article entitled “Put your tax cards on the table.” I hope you will read it. I see three problems with the Senate position on triggers.
First, the triggers were not adjusted for inflation or for an increase in the population.
Those adjustments are normal for a Tabor calculation on spending. Do you remember all of the arguments on “bracket creep” when we had different rates for income taxation? The effect then of inflation was to increase the rate of taxation. A single rate is good. The effect of not adjusting the triggers for inflation and population is to illogically reduce tax rates long before anyone anticipated (or should have) the effect. And we know that the Federal government will be sending less money to North Carolina.
Second, as pointed out by John Hood, the effect of this premature reduction in income tax rates is to fill the unmet serious needs of state government with excise taxes, gambling, alcohol, tobacco and marijuana taxes, (and why not taxes on prostitution). Regardless of your moral position on these, they violate basic principles of tax policy such as stability and transparency.
Each are highly regressive. “Don’t tax me, don’t tax thee, tax the fellow behind the tree.”
Senator Jerry Tillman said it another way, “I don’t play the lottery but if people are too stupid and do so, let’s use their money for a good cause.”
Third, the Senate position is based upon an economic and logical fallacy. When we reduced personal income tax in 2011-2013 from almost 8% down to 6%, more revenue came in. Why? We were the highest income tax rate amongst our neighbors and competitors, and these high rates dragged down economic growth. When the income tax rate was reduced from 6% down to 4.5%, more revenue came in for similar reasons. But it does not follow at all that reducing income tax rates further down to 3.5% or 2% will produce more revenue.
The personal income tax has been and still is half of the receipts for the general fund. The nonpartisan staff has projected a structural fiscal cliff coming up. It is obvious to me that there will be diminishing returns from further reduction of tax rates below 4%.
Think about it. If I am overweight at 290 and lose 30 pounds I am healthier. If I lose another 10 I am in fighting trim. But if I lose another 20 pounds I might be dead or dying.
Corporate Income Tax
I applaud the Senate and the House for continuing to reduce corporate income tax to zero. That is a small part of our revenue. It is a double tax on the same income and highly regressive. By putting in law that it goes to zero, corporations can move here with confidence that by the time they start making money that irrational double tax will not be one to consider in their proforma.
Tips and Tax Holiday
I agree with the Senate position on taxes on tips and the resurrected Sales Tax Holiday.
These make no sense. There is no reason not to tax tips differently than other taxes on income. A Sales Tax Holiday is just a gimmick. The Big Beautiful Bill provision on tips is getting tinier and tinier. If it stays in people will just classify more of their income as tips rather than as a bonus or other ordinary income.
NC Innovations
NC Innovation was a terrible idea from the start, corporate welfare run amok. You know all the arguments. The House position is better. I will suggest where that money could go.
Helene
Both House and Senate want to top the Rainy Day Fund back up to $4.5 billion. There will be additional disasters in the years to come but I don’t think you should budget as if you were to have another 500-year flood in the next two years. It would be better to get that fund up to $3.5 billion and then build it up to $4.5 billion in the 27-29 biennium. I would spend the money clawed back from NC Innovation for another $500 million for Helene relief. The President claimed before his election that FEMA under Biden was doing a terrible job. FEMA under Trump is doing a miserable job. The West needs more money soon.
Masters Pay
I agree with the Senate on this. I spent 16 years on the Education committee. All the evidence I saw was that Masters Pay did not make any difference in the effectiveness of teachers. If it were in a field that requires a master’s degree, it might be different. Trim that item down so that it only applies, for example, to physics or chemistry teachers. General education or liberal arts Masters Pay is a waste of money.
I would appreciate your feedback.
Cordially,
Paul Stam
