Tax-Hike Claim Is Absurd | Eastern North Carolina Now

    Publisher's note: This article appeared on John Hood's daily column in the Carolina Journal, which, because of Author / Publisher Hood, is linked to the John Locke Foundation.

    RALEIGH — Although hostilities have been underway for some time, I hereby issue a formal Declaration of War against silly, uninformed talking points repeated endlessly in North Carolina politics.

    In an earlier column, I cited the example of the state's unemployment rate. How many times have you heard that claim that North Carolina's dramatic drop in unemployment is nothing more than a statistical mirage created by discouraged workers dropping out of the labor force? This claim is totally false. Even if you include workers who've stopped looking for jobs, the most recent federal data show that North Carolina has had the largest labor-market improvement in the United States over the past year.

    Today's example is even more egregious. How many times have you heard the claim that the 2013 tax reform bill enacted by the General Assembly and signed into law by Gov. Pat McCrory will result in a tax increase for 80 percent of North Carolinians?

    The claim was ubiquitous during and after the tax-reform debate last year. Now that N.C. House Speaker Thom Tillis is the Republican nominee against U.S. Sen. Kay Hagan, the claim is making the rounds again. But it was false in 2013 and remains false today.

    In fact, the term "false" is a generous one. For months, I have labeled the claim "mathematically impossible," citing a 2013 analysis by the legislature's nonpartisan fiscal analysts and a 2014 analysis published by JLF. Now The Washington Post, hardly a creature of the vast right-wing conspiracy, has come up with another appropriate description of the "80 percent got a tax hike" claim: absurd.

    Glenn Kessler, the Post's fact-checker, looked into the claim because it was included in a post-primary ad against Tillis by the Senate Majority PAC, an independent-expenditure group allied with Democrats. While informed observers in North Carolina have long recognized the absurdity of the 80 percent claim, Kessler did North Carolinians a great service by clarifying its source: strange methodology from a North Carolina Justice Center contractor, combined with misleading rhetoric and sloppy reporting.

    The Institute for Taxation and Economic Policy (ITEP) is a Washington-based liberal outfit that has enjoyed a long relationship with the Justice Center. It supplies the Center with distributional analysis of state tax changes. When analyzing the 2013 legislation, ITEP modeled the effects within each quintile (20 percent) of taxpaying households. Rather than producing and promulgating a count of the share of North Carolinians getting tax hikes or tax cuts, however, ITEP/Justice Center focused on the "average" effect within each quintile — and then made the claim that for the bottom four quintiles in household income, the bill would raise taxes "on average."

    That did not mean that 80 percent of North Carolina households got a tax hike. I'll use a hypothetical to explain. Imagine that there were just 20 taxpayers, four in each quintile. Next, imagine that within each quintile, three taxpayers got a tax cut of $5 each and one taxpayer got a tax hike of $16. "On average," the taxpayers in each quintile would experience a tax hike of 25 cents ($16 minus $15, divided by four). But in reality, three-quarters of taxpayers would pay lower taxes.

    ITEP/Justice Center shouldn't have sliced the data this way in the first place. It was an invitation to misstating the real effects of tax reform — an invitation that was widely accepted through North Carolina political and media circles.

    Even the original "on average" finding appears to be widely off the mark, according to previous work by the fiscal staff and JLF. Our report estimated a net reduction in state tax liability for every income group — meaning that it was, indeed, mathematically impossible for the average household to have gotten a tax hike. But even if the ITEP/Justice Center study had been correct, its true conclusion was not that most poor and middle-class North Carolinians got tax hikes to fund tax cuts for the wealthy. Instead, the study actually concluded that income tax changes in the 2013 legislation reduced the tax burden for about half of North Carolina taxpayers, raised taxes on about 40 percent, and didn't much affect the rest. Moreover, many of the 40 percent losing from the deal were upper-income taxpayers. They lost special deductions or credits worth thousands of dollars, offsetting the taxes they will save from lower rates. Even factoring the (rather small) broadening of the sales tax into the mix could never transform the 2013 bill into the Dickensian nightmare some have tried to make it out to be.

    If the Left had been more upfront with the numbers, the debate would have unfolded quite differently. There's no question that some share of households — at all income levels — will pay more due to the tax legislation. That always happens with tax reform that exchanges lower tax rates (which affect just about everyone) for fewer credits and deductions (which affect a smaller number of taxpayers, albeit sometimes by a large amount). Whether 20 percent or 30 percent or, perhaps, 40 percent of households were net losers in the resulting exchange of rates and breaks would certainly have been a debatable issue.

    But the "80 percent" claim — widely circulated by those who, quite literally, didn't know what they were talking about — was always far outside the bounds of reality. So how often do you think we'll hear the claim repeated during the coming election campaign?

    To an absurd degree, no doubt.