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In My Words: The con game of a constitutional amendment on taxes

Newspapers across North Carolina recently featured a guest column by Elon Law Associate Professor Andy Haile, who expressed legal and public policy concerns about a proposed amendment to the state constitution.

The following column appeared recently in the Fayetteville (N.C.) Observer, the (Burlington, N.C.) Times-News, the Gaston Gazette, the Shelby Star and the (Wilmington, N.C.) Star-News via the Elon University Writers Syndicate. Views are those of the author and not Elon University.


Associate Professor Andy Haile
The con game of a constitutional amendment on taxes
By Andy Haile

No one likes to pay taxes. But as Oliver Wendell Holmes once said, that’s the price of civilization. 

The North Carolina General Assembly is apparently looking to fund civilization on the cheap, as it considers a state constitutional amendment that would cap North Carolina’s income tax rate at 5.5 percent.

That’s a risky proposition. It impairs legislators’ ability to respond to economic crises. The proposed change is also unnecessary. Tax policy affects essentially all citizens and is therefore subject to intense and widespread voter oversight, mitigating the need for a constitutional amendment to curtail over-taxation.

Rather than taking a reasoned, incremental approach to modernizing our tax system, the proposed amendment puts at risk the future quality of life in North Carolina. 

To understand the risk of this potential change, consider some context. North Carolina has had an individual income tax since 1920. For the better part of a century, the top tax rate held steady at 7 percent. It reached a high mark of 8.25 percent following the bursting of the internet bubble. 

But two years ago, with the election of Republican majorities in both the House and Senate, the individual income tax was changed to a flat tax with a single rate of just under 6 percent. It is scheduled to drop again next year to a historic low of 5.499 percent.

The proposed constitutional amendment capping the tax rate at 5.5 percent would put a ceiling on the income tax at a figure equal to the lowest tax rate in the history of North Carolina’s personal income tax. What will this do to the amount of tax revenues received by the state, which typically derives about one-third of total tax revenues from the personal income tax? The simple answer is that no one knows. 

Perhaps the lower rate will encourage economic growth. On the other hand, uncertainty in economic markets could result in lower than expected tax revenues. 

Kansas, for example, took aggressive steps to cut its income tax in recent years, but these cuts resulted in significant reductions in public services rather than increased economic growth. North Carolina should be wary of following the same path. Rather than gambling on the belief that lower rates will expand economic activity, prudence would argue for allowing the 5.499 percent tax rate slated to take effect in 2017 to run for a few years before mandating it as the maximum rate under the state constitution. 

The potential for significantly reduced revenues is only one type of risk involved in the proposed change.  Another risk is the possible downgrade in the state’s credit rating. The state treasurer has expressed this risk in a memo presented to legislators, but legislators claimed that the treasurer “cherry-picked” data to support her opposition to the proposed amendment. That’s an odd critique, given that the data used by the State Treasurer came directly from the ratings methodologies published by Standard and Poor’s and Moody’s, two of the most important credit rating companies. 

Moreover, even proponents of tax limits, such as the National Center for Policy Analysis, have acknowledged that studies indicate a constitutional cap on the income tax like the one proposed by the General Assembly has a negative impact on credit ratings. Republican State Sen. Ralph Hise, a supporter of the proposed amendment, even told WRAL-TV in Raleigh that “it’s time to take a new vision for the state of North Carolina, one in which we’re not evaluating ourselves based on somebody else’s view of our ability to borrow money.” 

Unfortunately, the cost of borrowing money is based almost entirely on “someone else’s view” – that of the credit rating agencies.  Given the uncertainty over the impact on the state’s credit rating, the General Assembly would be taking a serious risk by capping the state’s income tax rate. 

Finally, some issues warrant constitutional protection—this is not one. When there is the risk of a political majority overreaching at the expense of a minority group or viewpoint, constitutional protection is appropriate. That is because the minority group may lack the political power to protect itself from legislation harmful to the group’s interests.  

Tax policy is drastically different in that it affects practically everyone. There is no need to enshrine tax policy into the constitution because the widespread interest in reasonable tax policy already exists across the voting populace. If the General Assembly overtaxes, the voters will respond and express their displeasure. 

In effect, there already exists a check on over-taxation: an interested, responsive voting population. 

Rather than protecting us, amending the state constitution to cap the income tax rate puts at risk the fiscal welfare of the state and unnecessarily ties the hands of future legislatures. The General Assembly would be wise to leave tax policy to the regular political process, rather than putting it into the state constitution.

Andy Haile is an associate professor at Elon University School of Law.


Elon University faculty with an interest in sharing their expertise with wider audiences are encouraged to contact the Office of University Communications should they like assistance with prospective newspaper op/ed submissions.

Eric Townsend,
7/11/2016 3:50 PM