In recent weeks, North Carolina Governor Mike Easley signed into law the state's 2009 budget. Totaling around $21.3 billion, the legislation is supposed to respond to the current economic climate, but falls short.
Lawmakers had earlier proposed two new tax cuts, one regressive and one progressive. The regressive cut was a repeal of the state's gift tax. North Carolina is one of the last remaining states with a gift tax and, as CTJ has previously pointed out, the tax is absolutely necessary to ensure that the estate tax is collected. If a state does not tax large gifts, wealthy residents can avoid the state's estate tax by giving their assets to their children before they die.
The progressive cut proposed earlier was an increase in the state's earned income tax credit (EITC). The credit, which will increase from 3.5% to 5% of the federal EITC, will provide relief for the working poor.
Neither progressive advocates nor anti-tax advocates got everything they wanted in the budget deal that was approved. Both tax cuts were delayed until 2010. That means that wealthy North Carolinians will be able to avoid the estate tax if they wait until 2010 and then give their assets to their children. It also means that the needed help provided by a boost in the EITC will not yet be available at a time when prices are rising and increasingly burdening low-income North Carolinians.
The fact that these tax cuts were delayed is a result of the General Assembly's desire to balance the budget. But as CTJ has noted, even a 5% state EITC in North Carolina is not enough. In order to offset the burden of state and local taxes for a family of four, the EITC must be set at no less than 11% of the federal EITC. Next year, lawmakers should reject cuts in the gift tax that will result in reduced estate tax collections and instead focus on the needs of the working poor.