A proposed income tax cap in North Carolina survived a court challenge this week, leaving it to the voters to decide whether to lean in to what is a rare policy in state government.

The November ballot measure would lower the state’s 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. 

Attorneys from the NAACP and Clean Air Carolina sued last month to block the measure after state legislators narrowly approved it for the ballot. In the suit, the NAACP argued that the lower cap will prevent the state from adopting a graduated tax rate on people with higher incomes “and, over time, will act as a tax cut only for the wealthy.” For its part, Clean Air Carolina said capping the income tax rate further would hinder its advocacy efforts for more state spending on clean air and climate issues.

Polling is not yet available on the measure, but it 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.

The lower cap is unlikely to hold taxes down, according to a report released this week by the left-leaning North Carolina Justice Center. “Instead, policymakers often 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 notes 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,” says the Foundation’s Scott Drenkard. “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.”

In other public finance news:

Racial Bias Means Black Colleges Pay More

 

Underwriters charge higher fees to historically black colleges and universities thanks to what researchers say is evidence of racial discrimination in the municipal bond market. After controlling for relevant factors, black colleges and universities pay on average 14 percent more in underwriting fees compared with historically white institutions, according to recent research by professors from Duke University, Drexel University, University of Southern California and University of Notre Dame. In states like Louisiana, Mississippi and Alabama, the difference is even greater. 

The reason is that underwriters have to work harder to find buyers for the bonds. “Because [historically black colleges and universities] are located in states with high levels of anti-black racial animus," the report says, "underwriters face steep frictions when trying to find willing buyers."

The bias means the schools are losing out on real money: On the low end, researcher Pengjie Gao told Financial Advisor magazine, black colleges are paying $35,000 more each time they issue bonds. That amount of money, for example, could fund two student scholarships.

Infrastructure Spending Lags Behind Economy

 

State and local spending on roads, bridges and buildings may be at a record high, but it hasn’t kept up with economic growth, says Moody’s Investors Service. Governments are on pace to invest a record $389 billion this year, which maintains the amount -- roughly 2 percent of GDP -- that states and local governments have invested since 2010.

Federal spending hasn’t done any better, notes Moody’s. It has remained flat over the past five years at 0.6 percent of GDP.

All of this indicates that governments are continuing to defer infrastructure costs, despite a growing economy. According to Moody’s calculations, if state and local governments had maintained their pre-2009 infrastructure investment level relative to GDP of 2.5 percent, they would have been on pace to spend $4 trillion on infrastructure between 2010 and 2018. Instead, that total is expected to be $3.2 trillion, and could lead to even higher costs in the future. “Moreover,” the report adds, “declining infrastructure asset quality risks increasing the likelihood of catastrophic failures, which would be detrimental to public safety and result in much higher replacement costs.”

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