States may provide a window into taxes under Trump

Corrections and clarifications: An earlier version of this story incorrectly stated North Carolina’s actions in regard to the state sales tax rate. North Carolina expanded the items that were subject to the state sales tax. The story also should have made clear that in North Carolina, the state charges a sales tax of 4.75% and that another 2%, or more, can be added by counties. The story also incorrectly stated North Carolina’s top income tax rate in 2012. The top income tax rate was 7.75%. The story also should have made clear that some states are phasing out state income tax rates over time and the Tax Foundation’s position on North Carolina’s and Kansas’ tax reform proposals. 

President Donald Trump and Congressional Republicans are promising one of the biggest tax cuts since the days of Ronald Reagan.

But before moving forward, perhaps they should have chatted with Maria Wilson-Taylor of Asheville, North Carolina, who like folks in several other states has already experienced tax changes along the lines of what Congress and Trump may propose— and she doesn’t like them one bit.

The Tar Heel state is among a handful at the leading edge of a nationwide tax reform movement being pushed by conservative groups funded by the Charles Koch Foundation and other right-wing think tanks — a movement that critics contend reduces taxes paid by the rich but leaves intact or increases the tax burden on the working poor.

“I feel like I’ve taken two steps forward, but then the taxes come,” and it’s one step back, Wilson-Taylor said.

The culprit, as she sees it, is the state legislature, which four years ago cut corporate taxes and repealed the state’s graduated income tax, replacing it with a lower flat rate in hopes of boosting the economy.  To cover lost revenue, lawmakers expanded the state sales tax to cover more items, and North Carolina became the first state in 30 years to repeal an income-tax credit that had reduced taxes for low- to middle-income residents.

Since 2010, North Carolina, Mississippi, Kansas, Michigan, Maine, and Oklahoma — 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% to 7.95% in 2011 and to 7.15% in 2015. (It increased it to 10.15% just this year for those earning $200,000 or more.) Some of the states also have increased sales and user taxes, such as those charged on everyday purchases like gasoline and soft drinks, which are widely thought to impact the poor more directly. Half a dozen other states — Maryland, Iowa, and Virginia among them — have considered similar reforms this year.

Now the Trump administration and Republicans in Congress are talking about comparable tax reforms — fewer income brackets and possibly a higher consumption levy in the form of a border adjustment tax. Trump’s initial proposal, which he is expected to discuss Wednesday, may not include a border tax, but it continues to be a key provision of what Congressional GOP members are pushing.

Last fall, Wilson-Taylor noticed the $900 she took home every month from her two jobs — one as a cashier at a Payless Inc. shoe store and another as a part-time banquet server at the Asheville Crowne Plaza spa and fitness resort — wasn’t lasting as long.  That’s because she was paying more in state sales taxes.

In addition, Wilson-Taylor’s state tax refund last year was half, or about $250 less, than what she received in 2015. That delayed until this past December her purchase of a 2001 gold Toyota Camry that she needed to better juggle getting to work and picking up her 6-year-old son, Zyheim, from school. The state's tax changes, she said, are making it harder to reach her dream: moving out of the Lee Walker Heights public housing complex.

A blast from the past

One of the forces behind the reforms is Arthur Laffer, 76, the father of supply-side economics, which was championed by President Reagan. The theory holds that lower tax rates encourage people to work more, leading to higher tax revenue.

In December 2012, Arduin, Laffer & Moore, an economic and policy consulting research firm, released a report that identified a few of North Carolina’s economic “trouble spots,” including its “exceptionally high personal income tax rate” — 7.5% at the top end — and a corporate income tax higher than in neighboring states. The solution: Eliminate state income taxes and raise consumption taxes.

The Laffer report was written in partnership with the John William Pope Civitas Institute, a conservative N.C. think tank that has among its goals to “inform elected officials about citizen-based, free-market solutions.” The institute is 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 is friends with conservative billionaires Charles and David Koch, and served on the board of the Koch-supported low-tax, free-market advocacy group Americans for Prosperity. Pope also was budget director for former Republican Gov. Pat McCrory when the tax changes were being considered.

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 Laffer report circulated among lawmakers in 2013 and was the subject of discussions and seminars held in Raleigh. Bi-partisan committees met for years about North Carolina’s tax system before the reforms were passed in 2013, said Brian Balfour, executive director of the Civitas Institute. “To try to claim that was some far-right concoction or convention is simply not true," he said.

Kansas was one of the states that had earlier followed a similar approach. A year before coming to North Carolina, Laffer was paid $75,000 as a consultant by Republican Gov. Sam Brownback, who eventually signed a tax-reform law that cut Kansas’ top income tax bracket by almost a quarter (from 6.45% to 4.9%) and reduced the bottom rate by just one-seventh to 3%. He also exempted from taxes money earned from certain businesses. The changes later resulted in a $400 million state budget deficit that forced the legislature to increase the state sales tax.  Brownback’s office did not return calls requesting comment.

In North Carolina, lawmakers approved reforms that replaced the state income tax schedule with a lower flat rate of 5.8%, which dropped to less than 5.5% this year and expanded the state sales tax to include such items as movie and sporting event tickets, electricity and mobile homes, among other things.  North Carolina’s state charges a 4.75% sales tax and counties can add on another 2% or more. The state also repealed its Earned Income Tax Credit, which had given more than 900,000 low- to middle-income North Carolinians an annual $125 to $500 reduction in state taxes.

The reforms that favor the wealthy over the working poor are part of a larger effort, said Michael Leachman, director of state fiscal research at the left-leaning Center on Budget and Policy Priorities. Several conservative individuals and groups are “out there saying the entire South should be an income tax-free zone,” he said.

Another player in the state tax-reform movement, the Tax Foundation, based in Washington, D.C., has testified before state committees in Maine, encouraging lawmakers to consider a flat tax; in Minnesota, arguing the state should repeal its estate tax; and in Nebraska, urging it to lower its top state income tax rate. The foundation says it is nonpartisan, having supported retaining the Earned Income Tax Credit in North Carolina and opposed Kansas’ tax cuts, however, much of its funding comes from conservative foundations and think tanks.

The Tax Foundation was a presence in West Virginia this year when lawmakers considered a bill that would have replaced the state’s personal income tax with a flat tax, increased the sales tax to 8% from 6%, reinstated a tax on groceries, and increased those levied on electronic cigarettes, beer and soft drinks.

Ted Boettner, executive director of the West Virginia Center on Budget & Policy, which studies how tax policies affect lower income families, told legislators in February that a worker making $26,000 a year would pay $946 more under the bill.  Tax Foundation policy analyst Jared Walczak told some West Virginia lawmakers that their proposal had both pros and cons, but was “groundbreaking.”

The Tax Foundation’s positions are similar to the groups that fund it. Nine out of the foundation’s top 10 nonprofit donors support numerous conservative causes and accounted for a total of $1.1 million in grants between 2010 and 2015, according to the Center for Public Integrity’s search of IRS documents.

The Charles Koch Foundation and its sister organization, the Charles Koch Institute, together were the Tax Foundation’s second-largest donor, giving $488,131 between 2012 and 2015.

Among other six-figure givers: the John Templeton Foundation, which supports many conservative causes such as the anti-tax group FreedomWorks, and the Earhart Foundation, a large funder of conservative think tanks such as the free-market advocacy group Atlas Network. The Chase Foundation of Virginia, which funds right-wing political and free-market groups, gave the Tax Foundation $75,000 over five years.

“I don’t know if you consider them nonpartisan,” said Derwood Chase Jr., president of the Chase Foundation of Virginia, when asked about the group’s financial support of the Tax Foundation. “I don’t always agree with some of their positions. We are supporting them for their information.”

The Templeton Foundation declined to comment for this story. The Koch and Earhart foundations and the Atlas Network did not return calls requesting comment.

“We support a tax code that’s simpler, more transparent, more neutral and promotes economic growth,” said John Buhl, media relations manager for the Tax Foundation.  “Some people say that characterizes us as center-right or conservative, but we think it’s something all Americans support.”'

Now playing in Washington

Trump and the Republican-controlled Congress now appear on the verge of proposing tax reforms that mirror the proposals from Laffer and the Tax Foundation.

Details released earlier by then-President-elect Trump and by House Speaker Paul Ryan show their plans would collapse the number of income brackets, from the current seven to three: 12%, 25% and 33%. Both liberal and conservative groups have concluded that the plans would give wealthy taxpayers between 5% and 14% increases in after-tax income while lower income individuals would get less than a 1% bump.

But like an increase in state consumption taxes, congressional Republicans’ calls for some kind of border adjustment tax would hit the poor particularly hard, said Lawrence Zelenak, a tax law professor at Duke University.

“It would be passed through to people based on what they consume,” Zelenak said.

In Asheville, single-parent Wilson-Taylor worries that the proposed federal tax changes would only make life harder, as North Carolina’s tax reforms did.

“They’re going to come for every little penny that you have,” Wilson-Taylor said. “Where is the help when we need it?”

For an expanded version of this report click here.

The Center for Public Integrityis a nonprofit, nonpartisan investigative news organization in Washington, D.C.