North Carolina: Easley Tax Plan Too Good to Be True?

Another entry in the "no-tax floor" sweepstakes this week-- and a harsh reminder of the limitations of this approach to low-income tax relief. North Carolina Governor Mike Easley released his budget proposal for the upcoming fiscal year last week. The headline, from a tax perspective, was a plan to cut income taxes for more than a million low-income families. As the Asheville Citizen-Times covered it:

More than 1.2 million North Carolina taxpayers will get a break if Gov. Mike Easley’s budget proposal released on Thursday becomes law. Easley wants to eliminate the state income tax for nearly 600,000 low-income taxpayers and cut taxes in half for an additional 630,000.

Here's the Greensboro News-Record on how the plan would work:

Those who would pay no income taxes under Easley's plan include single people who make less than $5,000, married couples making less than $10,000 and those filing as head of household making less than $7,500.

Those who would have their income tax bill cut in half include single people making between $5,00 and $12,500, married couples making between $10,000 and $25,000 and heads of household making $7,500 to $20,000.

This all sounds great. But the folks at the North Carolina Budget and Tax Center put their heads together and figured out that the numbers didn't quite add up. In particular, BTC researchers noticed that the folks who would be "taken off the rolls" under the Easley plan are, in large part, paying no income tax to begin with.

Look at married couples: Easley proposed to exempt all married couples earning less than $10,000 from income tax. This is great-- but it's already part of the tax law. A married couple with no kids can claim a standard deduction of $6,000 in 2007, plus a $2,500 exemption for each spouse, which means a total of $11,000 of income is sheltered from tax. A couple with kids currently enjoys an even higher no-tax floor.

You can do the same math for single people (Easley proposes a $5,000 floor; current law gives singles a $3,000 standard deduction and a $2,500 personal exemption, so singles already have a $5,500 floor.) and heads of household. So, the BTC folks sensibly asked, if married couples, singles, and heads of household aren't being taken off the rolls, exactly who is? The answer, according to an ITEP analysis: dependent filers. Kids with lawn mower money and/or trust funds, as well as elderly dependents. And a lot less of them than Easley's office has claimed. A BTC report released today spells out the details.

None of this is to say that Easley's plan is a bad one. The early press on the BTC report screams that Easley's plan is "flawed," but the most important flaw is in the administration's math. The goal of reducing incomes taxes on low-income families is a fine one, but the administration seems to have made a few math errors in constructing their claims about it.

The BTC report identifies a number of ways in which Easley could make his income tax plan better targeted, most important of which would be making any low-income credits refundable. This means that the credit could be used to offset not just income taxes but the sales and property taxes that hit low-income working families the hardest.

If the design problems with the Easley plan take the wind of the administration's sails, that would be a shame. The BTC's report has more good than bad to say about Easley's plan, and the administration's heart appears to be in the right place.

But the Easley plan does raise important questions about the "no-tax floor" approach to low-income tax cuts. Focusing on "taking people off the rolls" arguably puts too much emphasis on reducing a low-income family's income tax from $10 to zero, and does nothing to solve the much more important tax problems facing such families, primarily sales, excise and property taxes. A quick glance at the North Carolina result from ITEP's Who Pays report shows that the income tax is the least problematic tax out there from a tax fairness perspective.

Here's hoping BTC's eagle-eyed number-crunching leads to a better result (say, an EITC for North Carolina) rather than deep-sixing Easley's stated goal of providing low-income tax relief.