OPINION: Earls' disturbing comments help make case for income tax cap
By Mitch Kokai, Carolina Journal
State government should face a limit on the amount of your income it can tax. Disturbing comments from one N.C. Supreme Court justice help explain why.
The court heard arguments Feb. 14 in N.C. NAACP v. Moore. It’s a case challenging two state constitutional amendments approved by voters in 2018. One would enshrine a voter identification requirement into the state constitution. The other would lower an existing cap on income tax rates.
Addressing the tax cap amendment, Justice Anita Earls conducted the following exchange with Kimberley Hunter, an attorney representing the NAACP. That group wants both challenged amendments stricken from North Carolina’s governing document.
“Didn’t the trial court find … that the income tax cap resulted in spending cuts that disproportionately hurt public schools or significantly reduced funding for communities of color? Were those findings of fact challenged on appeal?” Earls asked.
“No, your honor, they were not,” Hunter answered.
“But don’t those findings of fact relate to the question of whether or not a General Assembly that was elected from districts that were found to be intentionally racially discriminatory against black voters should be able to pass constitutional amendments that also discriminate against black voters?”
Answering Earls’ questions correctly requires a bit of background.
North Carolina has assessed a tax on individuals’ income for a century, dating back to 1921. At its peak, during the early 2000s, the top tax rate reached as high as 8.25%.
Prior to 2018, the N.C. Constitution capped income tax rates at 10%. State lawmakers never reached the cap. In fact, lawmakers would have been able to raise the rate by 1.75 percentage points before hitting the cap.
If lawmakers had pursued a hike from 8.25% to 10%, such a move would have amounted to a 21% tax increase. No one holding any degree of political power within state government has proposed such a large-scale tax hike in the last two decades.
By the time voters headed to the polls in November 2018, North Carolina’s political and fiscal landscapes had changed dramatically. Republicans had won control of both chambers of the General Assembly in 2011. They opened an era of sweeping tax reform in 2013. They jettisoned a multi-tier income tax system and replaced it with a single flat tax.
For the 2018 tax year, the flat tax rate stood at 5.499%. A constitutional amendment on the November ballot asked voters to approve lowering the tax cap from 10% to 7%. Note that the amendment itself had no impact on lowering tax rates.
Even with a new, lower cap, the General Assembly would have been free to raise the rate by 1.501 percentage points from the 2018 rate. Since the actual rate dropped again in 2019 to 5.25%, the new cap would have permitted an income tax hike of up to 1.75 percentage points. That amounts to a 33% tax hike.
Some 2,094,924 voters approved the lower cap when casting ballots in 2018. That was 57% of the vote. Supporters of lowering the tax cap defeated opponents by more than 537,000 votes.
With this background in mind, let’s review Earls’ comments.
First, she claimed the “income tax cap resulted in spending cuts.”
That’s impossible. N.C. policymakers never have reached the cap. They haven’t been close. At its highest level, North Carolina’s uncompetitive 8.25% income tax rate still fell well short of the old cap. Since voters approved the lower 7% cap more than three years ago, rates have been nowhere near that rate.
No spending cuts can be linked to the income tax cap. No reasonable person could conclude that the cap itself had any impact on public schools or communities of color. If Earls and her ideological allies have objections about the General Assembly’s spending and taxation choices, they are aiming their fire in the wrong direction. The problems they perceive have nothing to do with the cap.
Earls also implies that the 2018 tax cap amendment discriminated against black voters. It’s hard to conceive how this could possibly be true. All the amendment did was ensure that no future General Assembly could raise income tax rates beyond 7%. The cap makes no exceptions for taxpayers of different races. It targets no races for special favors or harmful discrimination.
While the legal debate involves a tax cap, recent history shows the General Assembly has been moving income tax rates in the other direction. The recent state budget, passed with bipartisan support and signed by a Democratic governor, dropped the rate to 4.99% this year. The same document calls for the income tax rate to drop to 3.99% by 2027.
Assuming that rate reduction takes effect, a future General Assembly would be free to raise the income tax by three full percentage points before butting up against the lower cap. That would represent a 75% tax hike from the newly lowered rate.
In essence, Earls is arguing that granting lawmakers permission to enact a 75% tax hike would not be enough. She assumes public schools, communities of color, and black voters all will suffer if the state constitution blocks lawmakers from raising income tax rates even higher.
It’s unclear whether any level of income taxation would be considered too high for Earls and her ideological allies. Without intending to do so, the justice makes an excellent case for preserving the tax cap.
