Two new ads from Senate Majority PAC wrongly claim North Carolina Senate candidate Thom Tillis “raised taxes on 80 percent of North Carolinians.” The claim is based on the Democratic super PAC’s misreading of an analysis of a 2013 Tillis-backed tax plan.
The ad hangs on an analysis by the Institute on Taxation and Economic Policy (ITEP) for the left-leaning Budget and Tax Center that found the 2013 tax changes backed by House Speaker Tillis would result in the bottom 80 percent of taxpayers, on average, getting a tax increase. The report does not say all of those people would see a tax increase, and the director of the Budget and Tax Center says the ad’s blanket 80 percent claim is “not accurate.”
While it cannot pinpoint the percentage precisely, ITEP projects that when all elements of the 2013 changes are fully phased in, a little more than half of North Carolina’s taxpayers will see a net tax increase, albeit a small one for most. And while there are winners and losers in every income category, ITEP found, lower and moderate income groups will see an average tax increase, while those in the top 20 percent of incomes will see an average net tax decrease.
Pushing back against the ad, the Tillis campaign cites a seemingly conflicting analysis by Suffolk University’s Beacon Hill Institute for the conservative John Locke Foundation that, the Tillis campaign notes, concluded the reforms resulted in “tens of millions of dollars in tax cuts for every income category.”
We’ll get into some of the details about the two reports, and how and why they differ, but suffice to say neither report supports the ads’ claim about the 2013 tax cuts resulting in a tax hike for 80 percent of North Carolinians.
Fresh off his tightly contested victory in the Republican primary, Tillis will now seek to unseat Democratic Sen. Kay Hagan in the November general election. Recent polls show the two locked in a tight contest, with Libertarian candidate Sean Haugh also getting double-digit support.
The 80 Percent Fallacy
The first ad from Senate Majority PAC, a Democratic super PAC, features a woman reporting “undercover” as Tillis delivers his primary victory speech.
“He’s up there right now making big promises,” the woman whispers from the back of the room. “But take a closer look.”
Then a narrator cuts in, saying, “Speaker Tillis gave tax cuts to the wealthy and big corporations; even kept breaks for private jets and yachts. He raised taxes on 80 percent of North Carolinians.”
The ad concludes with the woman, again whispering as Tillis delivers a speech in the background, “Thom Tillis says he’s up there for you, but he’ll cost North Carolina families big time.”
Another ad from Senate Majority PAC features a more straightforward attack on Tillis for the same tax plan.
According to the narrator, “As Speaker of the House, Thom Tillis … rewarded corporations and the wealthy, including keeping tax breaks for private jets and yachts. But then Tillis passed a whopping tax increase that hit 80 percent of North Carolinians, including taxing seniors’ pensions and families saving for college.”
At issue in the ads is a sweeping 2013 tax plan that was pushed by the North Carolina House speaker, Tillis, and other state Republican leaders. The plan included a lower, flat income tax rate of 5.75 percent by 2015 (down from the current three-bracket rates of 6, 7 and 7.75 depending on income). With regard to income taxes, the plan also — among other things — eliminated personal exemptions and increased standard deductions. In addition, the plan lowered the corporate income tax rate and expanded the state’s sales tax to include such things as manufactured homes and tickets for sporting events and movies. The Legislature also allowed the earned income tax credit for the working poor to expire. In other words, depending on one’s situation and spending habits, there are some things in the plan that could help a taxpayer’s bottom line, and others that could hurt it. (For more details, see the Associated Press’ summary of the changes here).
The ads cite the Budget and Tax Center, a project of the left-leaning North Carolina Justice Center, as the source of the claim that the tax package resulted in tax increases for 80 percent of North Carolinians. But that’s not what the Budget and Tax Center report says.
What the report states is this: “Accounting for the expiration of the state EITC [earned income tax credit], the bottom 80 percent of taxpayers, on average, will see their taxes increase under the tax plan compared to current tax law.”
The key phrase in there is “on average.” Not all.
The report from the Budget and Tax Center was based on an analysis by the Institute on Taxation and Economic Policy, whose simulation models use anonymous tax return data provided by the IRS. It’s a model similar to the ones used by the nonpartisan Congressional Budget Office and the oft-cited (by FactCheck.org) Tax Policy Center. Based only on the income tax portion of the changes, including the elimination of the earned income tax credit, about 35 percent of North Carolinians would see a tax increase, Meg Wiehe, state tax policy director for ITEP told us in a phone interview. Another 16 percent would see no change, up or down. And roughly 49 percent would get a tax cut.
That’s the picture before the expansion of the sales tax. For technical reasons, it is not possible to match the income tax return database with sales tax consumption patterns. Whether you pay the additional sales tax depends on whether you purchase things that were added to the tax list. But given that before the sales tax is factored in, 35 percent of taxpayers would see a tax increase and another 16 percent would see no change, Wiehe says, when sales taxes are added, “it’s safe to say a majority of taxpayers will pay more under this plan.”
But not 80 percent.
“Clearly that number was taken out of context from the Budget and Tax Center report,” Wiehe said.
Although there are winners and losers in every income category, Wiehe said, the ITEP analysis zeroed in on the average changes in each income quintile. Just looking at income tax ramifications, the report found that those in the lowest income quintile — people making less than $19,000 — will see an average tax increase of $2 per year. Breaking that down, among those in the bottom quintile, 29 percent will see a tax increase (and among them the average increase is $121), but 32 percent will see a tax decrease (an average of $103). That shows a bit of the swing involved here.
The average tax increase gradually rises from $2 per year for those in the bottom quintile to $14 per year for those in the fourth income quintile, people making between $52,000 and $84,000. In other words, the average income tax increase isn’t very much. But it’s an increase nonetheless, the analysis found. By contrast, those in the top quintile — people making more than $84,000 — will, on average, see a tax cut. For those with the very highest incomes — people with an average annual salary of $940,000 — the average tax cut will be $10,211.
Again, those are the findings before the expansion of the sales tax is considered. When all of the tax ramifications of the plan are considered, including the sales tax, ITEP concluded that the average tax increases will range from $23 per year for those in the bottom quintile to $74 in the fourth quintile. The next 15 percent of taxpayers — those making between $84,000 and $169,000 — will see an average tax cut of $98 per year.
“I think the bottom line is that the tax plan does raise taxes on everyday middle class and low income North Carolinians,” said Alexandra Forter Sirota, director of the Budget and Tax Center. “And it does give a huge tax break to the wealthy. But the use of 80 percent is not accurate.”
A Competing Analysis
The Tillis campaign, meanwhile, cites a different analysis of the tax plan, one performed by Suffolk University’s Beacon Hill Institute for the conservative John Locke Foundation. It concluded that “the average North Carolina household in every income category received a tax cut from the 2013 tax reform.” Just as we cautioned with the ITEP report, that doesn’t mean everyone.
In addition to showing the effects of the 2013 changes, the Beacon Hill analysis also considered the effect of a 2011 decrease in the state sales tax rate that was pushed by Tillis. Sirota, of the Budget and Tax Center, argues that’s inappropriate, because the sales tax — which then state Sen. Kay Hagan helped to implement to cover a budget deficit — was temporary. So Republicans simply allowed the sales tax increase to expire as intended. Nonetheless, Democrats in 2011 opposed the expiration of the higher sales tax rate, so Tillis’ campaign argues it should be included, by extension, as part of Tillis’ tax record. We take no position on that, but suffice to say, if included it shows Tillis’ tax-cutting record in a more favorable light.
“As Speaker, Thom Tillis cut Kay Hagan’s sales tax to provide relief for lower and middle-income North Carolinians, then led the passage of historic tax reform which cuts tax rates for all North Carolinian families and small businesses,” Tillis campaign manager Jordan Shaw told us via email.
The key qualifier in Shaw’s response is that the Tillis plan cut the tax rate for all. Due to other provisions in the tax plan, that doesn’t mean everyone got a net tax cut.
Paul Bachman, director of research at the Beacon Hill Institute, said that while it’s true that the gains in Tillis’ tax plan tilt in favor of those with higher incomes, people in each of six income categories will pay less as a group. For example, the Beacon Hill analysis found that in 2015 households earning less than $25,000 will, in aggregate, realize $79 million in tax savings from the 2013 tax reform (and a combined $157 million in savings from the 2011 and 2013 tax changes).
Here’s a graphic summary of the findings from the Beacon Hill report:
The Beacon Hill analysis was based on aggregate income data provided by the IRS. So the Beacon Hill report provides the total dollar impact within the various income categories it chose. In comparison, the ITEP report looked at the effect on individual taxpayers. In other words, while the reports’ conclusions may seem to be diametrically opposed, they aren’t actually talking about the same things.
“What they’re trying to measure and what we’re trying to measure are going past each other,” Bachman said.
To review, the ads claim that Tillis gave tax cuts to corporations and the wealthy. The 2013 tax plan reduced the corporate tax rate of 6.9 percent to 5 percent by 2015, and by any measure, the lion’s share of the benefits from the income tax changes went to those in the highest income brackets. The ads also claim Tillis kept tax breaks for jets and yachts, and it’s accurate that sales tax caps on the purchase of planes and boats were left alone.
But the ads’ central claim — that Tillis “passed a whopping tax increase that hit 80 percent of North Carolinians” — is wrong.
– Robert Farley