The NC GOP platform (Article II) states, “The government should tax only to raise money for its essential functions. We support a thorough review of expenditures each year, and we support a tax payer’s bill of rights.” “TABOR” is the usual acronym for a “Taxpayer Bill of Rights.” A goal I share with proponents of SB1080 is a mechanism that will restrain state government from overspending.

Does SB1080 actually effectuate these principles? Does it expand taxpayer rights or constrict them? Why is it a constitutional amendment? 

Population changes increase both tax revenue and the need for service. A typical TABOR adjusts for increases based on population and inflation. It does not adjust for changes in the level of service. e.g., decreasing the age at which young people are treated as adults, more scholarships for the children of disabled veterans, or adding to the duties of the state auditors.

This proposal seeks to remedy the spending problem by capping the state income tax rate at 3.5%. 

Currently,Article V of the North Carolina Constitution reads:

“Sec. 2.  State and local taxation. . .

(6) Income tax. The rate of tax on incomes shall not in any case exceed seven percent, and there shall be allowed personal exemptions and deductions so that only net incomes are taxed.”

Unlike the 2018 Amendment which reduced the cap from 10% to 7%, this one would lock in a future cap to a rate with which we have no experience. Since the personal income tax provides one half of the revenue for the general fund of the state, this is a risky bet. The proposal assumes that the decrease in the rate would bring in more revenue just as the increase in revenue occurred after the rate was decreased from 7.75% to 4.5%. This uses both economic and logical fallacies – the point of diminishing returns and post hoc ergo propter hoc.

To change that rate would take another constitutional amendment requiring 3/5 of the whole House, 72 votes and, in the Senate, 30 votes, plus a referendum. 

Why would we want to put the future of the state in the hands of Democrats whose vote to make up the 72 votes may cost the state dearly?  Why do I say that Democratic votes would be necessary when Republicans have a supermajority in the Senate and almost one in the House? Is it really a sure thing that the GOP will have supermajority in the future? NO.

For the last dozen years, the House has not agreed to this type of amendment. It has repeatedly been sent over by the Senate. The opportunity for legislative extortion will be immense. Unlike a veto override, a constitutional amendment requires 72 positive votes, not 3/5 of those voting. Any absences, vacancies or defections on the GOP side will increase the need for Democratic votes.

Why would Representatives and voters of 2026 think that they had superior knowledge of government policy to those Representatives and voters of 2031 or beyond? SB1080 makes no more sense than a liberal version that REQUIRED a minimum level of income taxation. 

Particular Problems with SB1080

SB1080 restricts increases only on income tax rates – not increases in overall state taxes – so it almost requires increases of other taxes. It is no surprise that the Senate plan is to reduce income taxes from 4% to 2.5% while adding to services subject to sales tax and adding sin taxes  (alcohol, gambling, tobacco, marijuana) to fill the gap! Would the Senate be willing to tax prostitution in the future? Why not? Some Senators want to eliminate the personal income tax altogether.

There is an inherent problem with squeezing income tax receipts into taxes on services.

A tax on services is an income tax on gross income. Suppose the “sales tax” was extended to the services of a CPA. What is a sales tax on a pure service but an income tax on gross income? A CPA could successfully refuse to pay the 6.75% “sales tax” claiming that it exceeded the 3.5% constitutional limit on taxation of income. The budget for that year would be in chaos. 

A dozen years ago I asked Arthur Laffer if a sales tax on services was really much better than a flat income tax at a relatively low rate. He said “no,” as long as we keep it low and flat. We have.

This Amendment only restricts the rate of tax. A future Assembly that clearly needed more revenue could solve the problem by decreasing personal exemptions or by eliminating popular deductions. Would that be good policy? NO.

SB1080 would encourage more borrowing. Receipts from a bond would not count against the income tax limitation and the resulting spending could be counted over decades rather than the years the money is spent. 

SB1080 would likely have a negative effect on our AAA bond rating. Bond ratings themselves are just that – opinions. And bond ratings (opinions) matter  – a lot. If we lose our AAA rating the cost of borrowing increases. Bond rating agencies do not like tax limitations that apply to the future.

The massive problem of government overspending is primarily at the federal level- not the state level. At the federal level, we are more than $39 trillion in debt. Some day a responsible Congress will meet a responsible President and come to a “Grand Bargain” on spending. Suppose that “Bargain” included a $1 trillion dollar reduction in federal spending. $900 billion would not be spent at all. The other 10% ($100 billion) would be devolved to the states to cover functions that truly belong to the states but have been hijacked by the feds. Education and some transportation funding come to mind. Conservatives would be in a state of delirious joy!! During the second Trump Administration we have already seen large reductions in monies devolved to state and local government, albeit with a large increase in deficits that can not be blamed on the Pandemic.

That “Grand Bargain” would require a $3 billion increase in North Carolina state revenues. Taxpayers would be delighted because of the corresponding huge reduction in the federal tax and debt burden. But it would be virtually impossible for NC to take up the offer if SB1080 were part of our Constitution. So many GOP members have taken Grover Norquist’s “no tax increase” pledge that a future amendment would have to rely on Democrats to vote “Aye.” Democrats could impose impermissible demands as ransom for the votes necessary to revise the Constitution.

I did not oppose the 2018 Constitutional Amendment setting the cap at 7%. By then we had already shown that tax rates below that figure were prudent and actually made North Carolina much more competitive. This proposal needs a lot of work. I could suggest several changes that could make this proposal workable.

Cordially,

Paul “Skip” Stam