May 3, 2017: This story has been corrected.
A group of conservative think tanks wants the nation’s tax system to look more like North Carolina’s. But so far, for the working poor, that hasn’t been a great deal.
Experts from think tanks heavily subsidized by anti-tax, free-market groups such as the Charles Koch Foundation have descended on state capitals armed with scholarly research arguing that tax cuts for the well-to-do lead to economic growth.
North Carolina has been one of the laboratories for this approach. In the Tar Heel State, wealthy families had their state taxes lowered while poor folks saw their tax burden increased or go unchanged. In 2013, the state legislature cut state income taxes, which are progressive — meaning the rich pay a higher rate than the poor — and expanded what was subject to the state sales tax, which is regressive, meaning the poor spend a disproportionate amount of their income on the tax.
In Washington, D.C., the Trump administration and Congressional Republicans have been considering a similar approach — lower federal income-tax brackets and a tax on imports — that some tax experts say would have comparable outcomes. Some of the same conservative groups that convinced states to change their tax systems have advised the Trump administration on economic and tax policy. Trump’s initial proposal, which he is expected to discuss Wednesday, may not include a border tax, but such a levy continues to be a key provision of what Congressional GOP members are pushing.
The effects on lower-income families are already playing out in a handful of states. Since 2010, North Carolina, Mississippi, Kansas, Michigan, Maine, Oklahoma and others have either reduced income-tax rates during some years, passed laws to do so in the future, or have put their states on a path that could remove income taxes. By 2022 Mississippi will cut taxes for the first $5,000 earned for all taxpayers, but will leave intact a flat tax for higher incomes. Maine dropped its top rate from 8.5 percent to 7.95 percent in 2011 and to 7.15 percent in 2015. (It increased it to 10.15 percent just this year for those earning $200,000 or more.) At the same time, many have increased sales and user taxes, such as those charged on such every-day necessities as gasoline and soft drinks, which generally hit the poor harder. Half a dozen other states — Maryland, Illinois and Virginia among them — tried to do the same in this year’s legislative sessions.
If sales taxes “keep going up, I’m going to end up in the shelter with the ladies where I work,” said Juanita Maestos, who works as a counselor at a homeless service center in Seattle and has watched the state Legislature fail numerous times to institute an income-tax system to reduce Washington’s nearly 9 percent sales tax. “You keep doing stuff like this and nobody is going to win.”
Two of the biggest forces behind the tax reforms have been Arthur Laffer, a blast from the past who’s considered the father of supply-side economics, and the Tax Foundation, a Washington, D.C.-based think-tank that markets itself as a nonpartisan research group, but is heavily supported by conservative-led groups such as the Charles Koch Foundation and the John Templeton Foundation.
Laffer, now 76, developed the eponymous Laffer Curve, a nearly four-decade-old theory that holds lower tax rates can encourage people to work more, leading to higher tax revenue. The argument became the basis for President Ronald Reagan’s economic policies known as Reaganomics and later for the conservative tea party. Laffer’s policies have been debated endlessly. His opponents argue his theory led to soaring federal debt in the 1980s and higher poverty, leading many to discount the theory. Those in favor of his ideas point to higher economic growth during Reagan’s two terms.
Laffer founded the Laffer Center, whose mission includes “educating people on economic ideas, [particularly] the lessons of supply-side economics.”
In December 2012, Arduin, Laffer & Moore Econometrics, an economic and policy consulting research firm, published a report that identified a few of North Carolina’s economic “trouble spots,” including its “exceptionally high personal income tax rate — 7.75 percent at the top end — and an uncompetitive corporate income tax when compared with other southern states.
“Income taxes have a larger negative impact on economic growth than consumption-based taxes,” the report argued.
Just a month before, North Carolina voters had delivered both the governorship and the General Assembly to Republicans for the first time in more than 100 years.
Laffer said he spent about a day or two in North Carolina when the legislature was considering its tax code changes and spoke with many lawmakers. Laffer said he isn’t sure what influence he had on the tax legislation but added he’s proud he convinced legislators such as Republican Sen. Bob Rucho, who was then co-chairman of the powerful Senate Finance Committee, to think about what Laffer perceives as smarter tax policies.
Rucho said the report circulated among lawmakers and was the subject of discussions and seminars held at the state legislature building in Raleigh at the same time lawmakers were writing tax-reform legislation.
“People will, if they’re smart, look at what someone else has done and say, ‘Why wouldn’t I want to do the same thing in my state?’ ” said Rucho, who supported the changes.
In July 2013, the North Carolina General Assembly approved the reforms that replaced the state’s graduated state income tax rate, which had ranged from 6 percent to 7.75 percent of a citizen’s income, in favor of a lower flat rate of 5.8 percent, which dropped to less than 5.5 percent this year. (This month, the legislature passed, mostly on a Republican party-line vote, further cuts in the individual and corporate tax rates; both would be the lowest in the Southeast.) To cover lost revenue, lawmakers broadened what is taxed by the state, including items such as movie and sporting events tickets, electricity and mobile homes. North Carolina charges a 4.75 percent state sales tax and counties can add on another 2 percent or more. The state also repealed its Earned Income Tax Credit, which had given more than 900,000 low- to middle-income North Carolinians a $125 to $500 reduction in state taxes.
But in Asheville, North Carolina, Maria Wilson-Taylor says she hasn’t benefited from the changes.
Last October, Wilson-Taylor, 27, started noticing the money she took home from her two jobs wasn’t lasting as long. After poring over dozens of receipts — Wilson-Taylor is a meticulous record keeper — she calculated she was spending more in sales taxes on various purchases. That meant less for her out of the $900 in monthly take-home pay from her job as a cashier at a Payless Inc. shoe store at the Asheville Mall and as a part-time banquet server at the upscale Asheville Crowne Plaza spa and fitness resort, a three-mile drive down I-240, but socio-economically worlds away from her red-brick, two-story subsidized apartment at Lee Walker Heights, where Wilson-Taylor and her son live.
That wasn’t the only tax hit Wilson-Taylor took. When filing her taxes last year, she learned her state income tax refund would be half, or about $250 less, than what she received in 2015, when she put the refund toward the purchase of a 2001 gold Toyota Camry with 120,000 miles. The car enabled her to better juggle getting to work and picking up her son 6-year-old son, Zyheim, from Vance Elementary School. Her refund this year will be smaller still.
The tax changes, Wilson-Taylor said, make it harder to reach her dream: moving out of public housing. “I feel like I’ve taken two steps forward but then the taxes come,” and it’s one step back, said Wilson-Taylor, who recently was laid off from her Payless job because of the company’s financial struggles.
For Wilson-Taylor, the changes enacted by the state in the tax system led to an increase of $5 to $10 a paycheck — “nothing that I could save,” she said. And the expanded sales tax and fewer deductions ate that away and then some, she said.
Wilson-Taylor’s financial circumstances are the direct result of North Carolina lawmakers following the Laffer report, which was written in partnership with the John William Pope Civitas Institute. The group is a conservative North Carolina think tank that aims to “inform elected officials about citizen-based, free-market solutions to problems facing North Carolinians.”
The institute receives money from numerous conservative groups. It’s mostly supported by the John William Pope Foundation, headed by Arthur Pope, chairman and CEO of Variety Wholesalers, Inc., which owns discount retail chains. Pope has donated millions of dollars to conservative causes, including $1.3 million to Civitas, according to tax documents.
Pope is also friends with conservative mega-donors Charles and David Koch, and served on the board of the Koch-supported low-tax, free-market advocacy group Americans for Prosperity. In addition, Pope was the budget director for former Republican Gov. Pat McCrory when the tax changes were being considered by lawmakers.
Among Civitas’ other largest donors are the David Koch Foundation and the State Policy Network, which serves as a trade group for conservative think tanks. The David Koch Foundation gave a total of $55,198 to Civitas between 2010 and 2012, and the State Policy Network contributed $60,000 between 2012 and 2014, according to the latest available IRS tax documents.
The foundations, as well as Laffer, are among several conservative individuals and groups that are on a mission to repeal or reduce state income taxes nationwide, said Michael Leachman, director of state fiscal research at the left-leaning Center on Budget and Policy Priorities.
“They’re out there saying the entire South should be an income-tax-free zone,” Leachman said. “You can see this kind of institutional, national push from them.”
The Center on Budget and Policy Priorities is funded by liberal groups, including the Sandler Foundation, which also gives to the American Civil Liberties Union, the environmentally conscious Oceana and founded the investigative journalism group ProPublica. The foundation is among the Center’s largest donors, giving the group $7.7 million from 2011 to 2014.
But Brian Balfour, executive director of the Civitas Institute, disputes the idea that the tax reforms were supported by conservative groups only.
“To try to claim that was some far-right concoction or convention is simply not true,” Balfour said. He added that bi-partisan committees met for years about North Carolina’s tax system before the reforms were passed in 2013.
The Center and other liberal tax groups frequently butt heads with the conservative tax organizations when they go before state legislatures.