Voters Lower Cap on Income Taxes in North Carolina

It's one of just two states that limits the income tax rate.
by | November 7, 2018
The North Carolina Capitol (David Kidd)

For results of the most important ballot measures, click here.

Despite vocal opposition to the idea, a ballot measure lowering North Carolina’s income tax cap headed to victory Tuesday.

Although opponents spent more than $1.1 million campaigning against the ballot measure, the constitutional amendment lowers the state’s current income tax rate cap from 10 percent to 7 percent. That’s still above the state’s current flat income tax rate of just under 5.5 percent. But in the past, the rate has been as high as 8.25 percent for high-income earners.

Capping income tax rates is unusual. Georgia is the only other state that does so, with a 6 percent cap approved by voters in 2014.

Still, the proposal in North Carolina was one of a slew of tax-limiting ballot measures across the country this year. Others were also successful, such as in Arizona, where voters banned taxing services, to Florida, where voters enacted, their own supermajority requirement for tax hikes. In Oregon, however, voters rejected new restrictions on raising that state’s revenue.

North Carolina’s lowered rate cap comes on the heels of the state's 2013 tax reform, which switched the state to a flat tax from a progressive tax structure with lower-earning taxpayers paying a 6 percent rate and top earners paying 7.75 percent. With the switch to a flat tax, wealthier earners saw a far greater tax break than low-income earners.

Opponents to the measure argued that the lower cap is unlikely to hold taxes down. Indeed, a recent report by the left-leaning North Carolina Justice Center noted that “policymakers often [instead] raise taxes such as sales and property taxes to meet identified needs in communities,” researchers wrote. That tends to put a greater tax burden on low- and middle- income families because a larger share of their income would be going toward taxes.

But the Tax Foundation noted that the proposed cap is still higher than not only North Carolina's current rate, but also higher than the income tax rate in every neighboring state except South Carolina (7 percent). “This rate cap is not actually changing anything in law,” the Foundation’s Scott Drenkard said recently. “I don’t know what this does except that it tries to make it so Republicans can protect what they’ve done [with 2013's] tax reform."

Still, many worry that locking down North Carolina’s income tax rates will hamstring future policymakers' ability to raise revenue. North Carolina is one of a handful of states that has prioritized tax cuts over restoring education funding since the recession ended in 2009. It also is among states that saw teacher protests this spring over funding. Restricting an important policy lever hampers how the state can raise money for education and other vital programs and services in the short- and long-term, opined Meg Wiehe, the deputy director of the Institute on Taxation and Economic Policy, in a WRAL.com editorial.

“None of us has a crystal ball,” she wrote. “We cannot with 100 percent certainty predict what our collective public needs will be one year from now, let alone 5 or 20 years in the future.”

For results of the most important ballot measures, click here.