Crunching the tax cut numbers

A childless married couple with $1 million in income stands to save $2,577 on its N.C. income tax bill thanks to changes that will take effect in 2019.

A similar couple with $120,000 in income will save $386. A couple making $25,000 will save $150.

Some readers of this column are already scurrying to jot their next tweet. “Ah, ha! This just proves that the Republican-led General Assembly cares only about the rich. #VoteBlue”

They might add basic math to the argument. “Millionaires will get tax breaks 17 times as large as struggling working families, thanks to the dastardly GOP. #VoteBlue”

While those looking for ways to criticize N.C. lawmakers might be satisfied to stop there, more curious readers will want to learn more about the context. Why is the tax break larger for a couple with more income? How much tax was each couple paying before the latest cut? What kind of impact does the cut have on each couple’s household budget?

Answer those questions, and you are likely to end up with a much different assessment of the numbers cited above.

North Carolina’s flat personal income tax rate stands at 5.499 percent today. That’s roughly 30 percent lower than the top marginal rate of 7.75 percent that Tar Heel taxpayers faced just five years ago. In 2019 the single flat rate drops to 5.25 percent. That cut of nearly a quarter percentage point represents about a 5 percent cut in the rate.

By the way, this is completely independent of a proposed constitutional amendment on the November ballot. That proposal asks voters whether they want to guarantee that the tax rate never will climb above 7 percent in the future. Right now, the constitution allows lawmakers to raise the rate as high as 10 percent.

The already scheduled 2019 rate cut affects all taxable income, regardless of the taxpayer who earns it. Those who pay higher tax bills today because of their larger incomes will save more money in 2019 thanks to the general rate cut.

At the same time, though, another change takes effect that has a proportionately larger impact on those at the lower end of the income scale. The standard income tax deduction jumps in 2019 from $8,750 to $10,000 for an individual taxpayer. A married couple’s standard deduction increases from $17,500 to $20,000. That’s a 14 percent increase.

To recap: The tax rate drops by about 5 percent. The standard deduction jumps about 14 percent. How do those two factors impact taxpayers in different economic circumstances?

Let’s return to the households identified above. We leave children out of the discussion. State child tax credits clearly benefit those at the lower end of the income scale.

In previous columns, I’ve labeled the $25,000 couple the “bank teller” household. That household owes $412 in state income taxes under current rules. As mentioned above, the tax changes will save this household $150 in 2019, dropping its income tax bill to $262.

That represents a 36 percent cut in the couple’s tax bill. The $262 represents slightly more than 1 percent of the household’s income.

The $120,000 “bank president” household owes $5,636 in income taxes under current rules. Its $386 tax cut in 2019 will drop the bill to $5,250. That’s a nearly 7 percent cut in the income tax burden. State income taxes now represent less than 4.4 percent of household income.

The bank president’s $386 tax cut is 2.5 times as large in dollar terms as the bank teller’s $150 cut. In terms of proportion of the overall tax bill, though, the teller’s break (36 percent) is five times as large as the president’s break (7 percent).

Consider also that the bank president now pays nearly 14 times as much in state income tax as the bank teller to support the same state government. With the 2019 tax cut, the president will end up paying 20 times as much.

How about the “millionaire” household? Under current rules, that couple faces a state income tax bill of $54,027. (Its tax burden is more than twice as large as the bank teller’s total income.) With the 2019 tax cut of $2,577, that bill drops to $51,450. That’s slightly less than a 5 percent cut in the tax bill. The new tax takes up about 5.1 percent of household income.

Yes, the millionaire household’s tax cut is 17 times as large in dollar terms as the bank teller’s $150 break. Proportionally, though, the teller’s 36 percent tax break is seven times as large as the millionaire’s break.

Under current rules, the millionaire pays 131 times as much tax as the bank teller to support the same state government. In 2019, the millionaire household will pay 196 times as much.

These are good numbers to keep in mind the next time a #VoteBlue partisan argues that Republican legislators care only about helping the rich.

Mitch Kokai is senior political analyst for the John Locke Foundation.

Mitch Kokai is senior political analyst for the John Locke Foundation.