- North Carolina voters, you'll consider capping both the state's income tax rate and possibly local property taxes.

And this comes as state revenue collections are forecast higher than expected.

This is State Lines.

- Quality public television is made possible through the financial contributions of viewers like you, who invite you to join them in supporting PBSNC.

(upbeat music) ♪ - Welcome to State Lines, I'm Kelly McCullen.

Joining me today, Dawn Vaughn of the News and Observer, Paul Shumaker of Capital Communications.

To his right is Scott Falmlen of Nexus Strategies and Colin Campbell of WUNC News.

Hello everyone.

I usually have banter before, but we have lots of topics.

I think you said you've written more tax stories than you ever have in your career, Dawn.

- That is right.

Just probably in the past week, I think.

- I gotta bet, guess what you're gonna talk about right now?

- Taxes.

- Taxes.

- Tax time.

- The tax time.

State and House, the State House and Senate made good on part of the state budget deal by approving a statewide vote on a possible state constitutional amendment that could lower the maximum income tax rate.

Since constitutional referendum bills cannot be vetoed by the governor, well, we don't know what he would do, but voters, you get to decide if North Carolina's top income tax rate should be no greater than 3.5%.

The state constitution previously capped income tax rates at 10%, then voters lowered it to 7%.

Here's debate.

- The costs don't magically disappear when you destroy the state's revenue.

They just shift.

So a vote for this bill is a vote for toll roads.

A vote for this bill is a vote for higher sales taxes.

A vote for this bill is a vote for higher property taxes and even more decay if that's possible and the last 15 years have already brought us.

- Hard consequential questions should be put before the people.

Maybe we should ask them, even if it's within our power to do certain things.

Maybe we should ask the people.

- That's Representative Dean Arp.

To that point, more than one representative, Colin, said, "Yes, we can pass tax law.

"We can cap, we can do things through legislation, "but why not ask the voter about an amendment?"

Is that fair or should we expect legislators to just do the job?

- Well, ultimately gonna do both.

I mean, we've got the plan that legislative leaders agreed to on the step downs in the income tax rate that's gonna go well below 3.5% over the coming years.

So ultimately, the constitutional amendment doesn't change the plan on what the tax rate's gonna be.

It just ties the hands of future legislatures.

If they wanted to go above 3.5%, if this amendment passes by the voters in November, they won't be allowed to.

They're gonna have to raise money some other way, whether that's sales tax or some other kind of use tax that they're not necessarily hemmed in on constitutionally.

- Scott, in transparency, Josh Stein has been counseled by Nexus Strategies quite extensively, sir.

I've never heard Governor Stein or even before candidate Stein talk about raising income tax rates, just hold the line.

So this does hold the line, but at 3.5%.

- Well, it's really irresponsible because as Colin just said, it does tie the hands of future legislatures and you just don't know what's coming down in the future and what the needs of the state might be, along with the property tax reforms that they just put on the ballot as well, which will hamper local governments and school boards.

This is all a political ploy.

The Republicans are not in great shape going into this election.

They haven't passed a budget since 2024, even though they said they've reached a framework for a budget, we haven't seen any details of that.

I think they're just trying to CYA, for lack of a better word, and we'll see what the people say.

I mean, we did, as you just mentioned, pass a constitutional amendment to cap the tax at 7% in 2018.

What's changed?

And so it's just very irresponsible.

- Paul, what has changed in the Republican formula to say if 7% was good for a tax cap, 3.5% might be better?

- Well, one, nothing has changed.

I mean, for the last 16 years, you've been hearing on the Democratic side, every time Republicans have talked about reducing taxes, the sky's gonna fall, the sky's gonna fall, the sky's gonna fall.

The sky has not fallen.

Revenue continues to go up.

And so basically what you're looking at, you've got a legislature that absolutely has a plan in place to take it below 3.5%, and they're looking at buying a guarantee for the voters.

They're willing to put that out there to say, hey, we're gonna put a cap on this.

There's a lot of talk going on about affordability, and what you're gonna hear from the Republican side is, we trust the people, we believe you should do better with your own money, whereas on the Democratic side, you're gonna say, we need to empower government to help fix the affordability problem.

- Dawn, there were three former Democrats who have gone, at least two of the three have gone unaffiliated.

I think Representative Willingham was not there.

But the two out of Mecklenburg County that are unaffiliated, did they put this over?

'Cause I thought the Democrats looked awfully united against this cap.

- Those Representative Carly Cunningham and Representative Naseef Majeed, both Mecklenburg County former Democrats now switched to unaffiliated after losing their primary, and they voted for this.

I think a lot of the debate was over, should we cap the taxes?

That's not happening yet.

If you put it to voters, but some of the Democrats that spoke on the floor, their objections was that there wasn't that second part of the question, which is, do you want this cap at 3.5%?

And then what happens as a result?

Colin talked about what they're going to do, or looking at raising other taxes.

You can also spend less, which is what a lot of Republicans would prefer.

But I asked Speaker Hall and Senate Leader Burger this week about why not cap other taxes too?

Like the sales tax, which everybody pays.

We've all paid it probably today already once.

Because if you're looking at future legislature's needs, if they can't raise the income tax and they're not going to reduce spending, then they're going to look at other ways to cover those costs.

And fees could be another way, assuming that they don't want to reduce spending.

- I think ultimately there's sort of this philosophical argument of what's the best tax to sort of lean on.

One of the interesting points that Senator Ralph Heist, one of the Republican senators made during the debate, is he compares North Carolina's tax structure to Tennessee.

His county borders Tennessee, and Tennessee has no income tax, and he wants to see North Carolina go that direction.

But of course, you still have to fund the government with other types of taxes, and with no restrictions on what you can do about sales tax, gas tax, grocery tax, that ends up what they may look towards replacing this income tax revenue with.

- Paul, have you done polling on this?

I know you're a statistics guy as much as anything.

How does the public, whether they're Republican or Democrat, feel about capping income tax rates?

- Well, capping income tax rate, capping property taxes is very popular with voters.

And when you talk about looking at other taxes, maybe offset from government costs, like sales tax, whatever, keep in mind there is no sales tax on food.

So when you're capping the income tax, you're allowing that individual to keep more of their money.

When you're capping property taxes, you're providing some degree of security for those particularly older folks who are living on fixed income, people trying to get into their first home.

We won't talk about affordability.

The property taxes, they deterrent.

Raising property taxes is a deterrent.

- That's the next segment, though.

We're gonna get right to that.

But Scott, to your point, if Democrats and Republicans say, this is a popular idea, and you're a Democratic candidate, what would you advise here?

Is this a train you just kinda sidestep and worry about the future?

Or tackle it head on and say it's not good policy if that's what your candidate prefers?

- Well, I'm not sure I agree that it's wildly popular, as Paul surmises.

I mean, in 2018, when the 7% cap passed, it passed with 57%, which is a healthy margin, but not an overwhelming margin.

And the 5% cap failed.

So we'll see what happens with this one.

- Yeah, the debate over continually reducing these state income tax rates comes as the state financial analysts out there are reporting higher than expected state tax revenue collections.

Analysts expect now the two-year North Carolina revenue to be $1.3 billion higher than they forecast, and over 2.5 billion, with a B, dollars higher, than the certified budget estimates.

If you break it down, a budget's two-year cycle, 608 million extra revenue dollars for this budget year, and 713 million dollars for 2027.

- Phil Berger's team's always bristled, and people come on this show, they'll bristle at saying, "This guy is falling."

This is the 15th year in a row, that's a statistical fact.

Revenues are higher, so does that change anything about the caps, or anything about what they wanna do with budget and tax law?

- No, it doesn't change anything about the caps.

First of all, it does show you that putting some measures in and lowering taxes is a good thing, actually for the growth of government, if you look at government revenue and the things that's being generated here.

Fact of the matter is, is that what's driving the political popularity of these caps is the affordability issue, it is the economic.

In 2018, the economic numbers were totally different than what the economic numbers are in 2026.

You do have arguments on energy prices and the constraints that it's putting there, but bottom line is, is that giving some certainty on tax policy and allowing the consumer, I mean the people, the voter, to know, have that certainty put into place, it's only gonna be a good thing, and the last 16 years bears that out.

- Colin, how does the revenue picture, when it's continually rosy, it continues, the Stein administration says, "Oh yes, right, it's 'cause of the stock market "having a booming year this year."

So, I mean, Berger's team can say, "I told you so."

- Yeah, and I think the thing to realize here is that the track record is since 2011 when Republicans took over, right, and they've been continually cutting taxes, but in a very favorable economic environment, aside from the COVID year, we haven't had a full-on recession since back when the Democrats were in charge, and that's where we stress test the economic policies of what does the revenue picture look like with the current tax environment if you do have a recession.

There will be one at some point.

It may not be next year, it may be in five or 10 years, and that's where the proof will really be to see what was the right approach for taxation and all these other issues.

- Scott, as a political ploy, this was dropped last Friday.

It was a little bit after we had recorded the show for last week, but I wanted to bring it back in.

How does it change for you?

The state is making money.

You could also argue, and I could argue, to say, well, if the state doesn't spend a healthy amount, you can always make a profit, if you will, or overcollect.

- Well, I think, remember, too, that we haven't had a budget since 2024.

We've been on a continuing budget where we probably needed to see some step increases to fund essential services, but I would take a little bit of issue with what Paul said.

We had a great economy in 2018.

I think Donald Trump would agree with that.

Since he was president, we had a great economy in 2018, according to him, but I think there is this surplus.

I think we need to replenish money in the Rainy Day Fund.

We've had to spend a lot of money out of that for Western North Carolina recovery, and I think there are ways to give some limited rebates or refunds to taxpayers, kind of on a one-time basis, when you have an excess of money, without structurally limiting what future legislatures can do to meet the needs of North Carolina.

- I remember that rebate.

It was Senate Leader Berger and now in Congress, former Speaker Moore, had talked about that they were going to give taxpayer rebates because of the revised, I don't know if it was the revised revenue forecast or before about over-collections.

That didn't end up happening.

We're still waiting on that several years later now, but if you're over-collecting money, then it's thinking long-range.

What are you gonna do with it?

A lot of, especially with Helene, those that have spent for years, wanted to put more money in the Rainy Day Fund, have, that worked out for them.

There's still a lot of money in there that was talked for a while, but there are all these other increased costs and the property tax cap amendment, important thing to note about that is there's no amount.

So if voters pass it, it's the 2027 legislature that is gonna come up with the amount.

But again, that is another, this balance of if you limit taxes in one area, what is our future governments or local governments gonna do to get more tax money from people?

And right now, it's property taxes are going up and up and not everyone's salaries are going up and up to pay these increased property taxes.

- Why doesn't the media ever scrutinize the fiscal analysts who always, and to the credit of the critics of them, they always are too conservative with the revenue.

It's always a little below, it's always estimated higher or the recession they called for never happens.

- Well, the consensus revenue forecast is just that.

It's a consensus.

So it's part of the Office of OSBM, Office of State Budget and Management, which is a cabinet agency of the governor and the General Assembly's Fiscal Research Division.

So it's both of them coming together, but it has been, there is more money coming in every year as long as I've covered the legislature.

- Yeah, and if they forecast something and it turns out revenue comes in way below that, then the state's in bad shape if they spent the money and then it's the analyst's fault.

They don't wanna be the ones who take the fall if there's something like that.

- It's a little hopeful thinking.

- But look, here's the thing, I think everybody's missing the point here.

Look at the cap as bringing accountability to government.

Everything right now, this whole discussion has been about spend more, spend more, spend more on the government side.

We don't have that luxury at home.

We don't get to go to our boss and say, hey, give us more money 'cause we need it 'cause we haven't managed our money here.

This is about bringing accountability for local government.

And this is also at some point in time, if the revenue issue becomes that, there needs to be an honest discussion about how you limit and reduce the scope of government, which is what people living in the private sector have to face every single day and they're running their businesses.

- Well, from state revenue to, let's talk about local revenues, local tax policy, legislative Republicans largely push through another statewide vote, once again, asking you on the same midterm ballot this fall, if you want property tax limits on your local government.

This amendment will not define property tax caps at any level.

It does authorize the General Assembly to craft future property tax reform and limitations.

One side says, hey, the people, you, should be included on tax questions.

You heard Dean Arp say that.

The other says the state's making it more expensive on local governments and now, the state's trying to limit the ability to cover local costs.

- No one gets priced out of the home they own.

They get taxed out of the home they own.

So when high property taxes cause hardship and pressure people out of their homes, it is the government's fault.

- But there is a major difference between targeted tax relief and permanently limiting local governments through a constitutional amendment.

One is thoughtful policy.

The other is tying the hands of future local leaders, regardless of what challenges that they may face.

North Carolina is not a one size fits all.

- Scott, I've gotten my emotions out of politics years ago with state politics.

I enjoyed both sides of the floor debate.

Both sides make points that I can relate to.

I'm an average voter out there.

How should we interpret the idea of, you know, capping these renegade city and county governments?

- Well, first of all, this constitutional amendment does not do that.

This is a farce.

This constitutional amendment requires the legislature to look at capping property taxes.

The legislature already has the power to cap local property taxes if they want to.

So I'm not quite sure what the purpose of this constitutional amendment is.

And county commissioners and school boards all across the state, almost unanimously, both Democrat and Republican, oppose this constitutional amendment.

Listen, Paul makes a good point about affordability.

I think both Democrats and Republicans are looking for ways to make things more affordable in North Carolina.

From a property tax standpoint, there are multiple ways to do that without this kind of farcical constitutional amendment, which does nothing to cap property taxes.

Homestead exemption, a special exemption for seniors.

There are multiple ways to combat rising property values to protect those that are less fortunate and those that are seniors who need some help.

- Paul, that's a point.

Veterans, your senior property owners, but I've heard Republicans say help the working family, which would include veterans' families, but I would venture to say senior families have raised their families and have adult children.

So when you start carving out those little side exclusions, how does it affect things?

- Well, first of all, and Scott made a good point when he was talking about where the legislature are and what the legislature can do.

What this issue does and what the referendum does, it forces the legislature now to start to address this.

I've said this very much before.

We have a horse and buggy tax code in this state.

We have to look at what takes place at the local level.

We have to look at what takes place at the state level.

And the fact of the matter is, is that this is the first step of actually forcing the state legislature to get into the weeds, even with local government, has to be a working partner here because you just cannot cut off one source of revenue without providing other alternatives.

But the basic bottom line is, we're talking about providing the affordability of keeping your home once you've worked.

And we're also forcing into accountability of these local governments, be it cities, who you make the argument the cities have been a bad, if not the worst operator as it comes to raising property taxes.

I think Wilmington's looking at about a 15 to 20% tax increase.

And so this is forcing that issue of accountability and we need to have that discussion.

- Let me just say this.

The property tax is the primary source of funding for county governments.

And public schools are the biggest part of that budget.

And this is just one more way to make public schools underfunded, understaffed and lower quality.

And this is almost becoming a self-fulfilling prophecy of the Republicans in the legislature who have always bad mouthed public schools.

And now by their actions, they're gonna make public schools even worse.

And I would just say that if it requires a constitutional amendment to force the legislature to do their job, I think that's more of a commentary on the poorness of our legislature than anything else at this point.

- Quite frankly, we have the money in this state to fund our public schools.

What you gotta have is political leadership committed to putting those schools first and other programs second.

The fact is every county right now, if you look at revenue streams of the counties, if you look at the cost of their schools, if that's their first funding priority, to fund that first.

Republicans run this-- - I would say the same thing about the Republicans in the legislature.

If we adequately fund public schools, and then we might be talking about something positive.

- Why is there not will on the Republican leadership side to spend at a level that makes even Democrats and moderate Republicans happy?

You just brought that up.

- We're talking about spending on either side from a standpoint?

- Yeah, what are you, fully funding public education, whatever that means anymore.

- Well, first of all, you look at the Republican philosophy is we believe that your quality of your school should not be determined by the zip code in which you're born in.

It should be determined by the school you live in.

And that's really quite frankly, where you look at the Democrats, let's put public schools first, and let's limit flexibility and options for families to be able to make those choices.

The money is there.

The schools are funded.

I mean, the money has been there.

And we can continually have those questions, but the question that gets into when you look at the actual structure of this, particularly at the local level, is what funding are we gonna wanna put first?

Do we wanna go to a zero-based budgeting process in this state?

Let's do that.

And then you're gonna hear the cries and the outcries coming from the left about all the government positions that has nothing to do with public education.

- Dawn, you know it's a good topic.

Do you have one more comment?

- The legislature, the Republicans have been in charge of the legislature for 15 years.

Why haven't they done zero-based budgeting?

- Well, Senator Bergen, I think it was Bergen, proposed that in a committee recently, but I don't know if he's gonna get any further with it.

- It means a lot of work for legislators if they go that route.

- It means a lot of work.

It means a lot of tough decisions.

That comes back to my argument about the whole capital property taxes.

It is an opportunity to start to force to have those discussions.

Those are discussions that need to take place.

- They've had 15 years of opportunity.

- And they've had 15 years of generating revenue while they've been reducing taxes and increasing the funding there without having to increase that state tax burden.

- Then why is school funding 49th in the nation?

- Then the question would be, will Governor Stein support zero-based budgeting?

- Don't know.

- I don't know if Republicans are pushing zero-based budgeting other than that one committee.

- Okay, we have this Whatley Cooper race that's gonna, they say, gonna buy every ad in town.

Is there room for the voter to learn more about the property tax?

And I'll ask the consultants, is it worth spending money to fight for approval?

- This is gonna show up on the bottom of your ballot.

Most people are going to the polls knowing whether they wanna support Roy Cooper or Michael Whatley.

They may not have thought about this.

And the question is, do you want limitations on property taxes?

It's really hard given the property tax landscape where people's values are higher, their tax bills are higher, for people to say, no, I don't want property taxes even though, as Scott said, the legislature does have the power to do those things.

And they're doing some of those bills.

There's changes to loopholes around housing developments and moratorium on revaluations in certain counties this year.

So there's action being taken.

But trying to message this as to what it might do in the future, not knowing what it's going to do because they're gonna pass the legislation later, that's a really hard sell.

And in this landscape where you are gonna have other races crowding out the spending, who wants to be the entity that creates a referendum campaign of vote no and spend a lot of money on that?

I don't know.

- Does the cash follow issues like this or do we just stay top of the ticket?

- It's driving people to vote who maybe aren't as excited about the US Senate race.

Or it's another thing to push people, I think, that not just Republicans, though, Democrats too.

Most people have an opinion on taxes and how much they pay on taxes.

So they'll be thinking about that even if it's just one sentence instead of a paragraph on the background there.

But these two constitutional amendments about taxes that have already passed are a little bit of a trade.

So the House has been pushing for property tax reform for months.

This has been a priority of them.

The income tax rate cap is something that's been a long priority of Berger as far as already the agreement is reducing income tax down to 3.49% anyway as part of the budget deal.

- Let me give you the political consultants view of the world.

The people that are gonna turn out and vote in the US Senate race, those numbers are gonna be baked.

Our data's gonna allow us to go ahead and determine those numbers.

And we're gonna have a ballot measure read on that.

You make a very good point about voter turnout.

This is gonna help Republicans on their voter turnout problem that they have going into these midterms.

One of the reasons why Democrats are gonna fight this.

Fact of the matter is that it's not about running a statewide race.

It's about using your data to target the voters who agree with you, who are mid to low-profensity voters and getting those particular people to go out and vote.

While the opposing side has to find folks who actually say, "Hey, let's not put a limit on my taxes.

"Let's not put a cap on my taxes."

And try to get those folks to go out and turn out and vote.

- I'm not sure this is gonna be a driver of voter turnout at all.

And as far as the TV ads are concerned, I think there'll be plenty of air time because the 30-minute newscast is gonna be down to about 16 minutes by the time you get all these ads on the air.

- You gotta have weathered sports.

- You could have up to, I think, six or seven constitutional amendments if all the things going through the legislature pass.

So what you might see is a campaign like we saw in 2018 with constitutional amendments was a vote no to all of them campaign, opposed the power grab by the legislature.

And that's the messaging you see.

- I've got about two and a half minutes, Dawn.

The House and Senate used their super majorities to approve the amendment questions.

They were able to handle one veto override among several bills that are in limbo.

Legislators approved enrolling North Carolina in that federal program that would give you a tax break.

If you donate to private school tuition organizations, you can give up to $1,700 to a qualifying SGO, as it's called, and then take the break after 2026.

Governor Stein vetoed this bill because he supports public education.

He says other high-profile bills were not considered for an override attempt.

The Trump school voucher, no one's watching that that I've ever heard anyone talk about very, very much because the folks who want vetoes overridden want that constitutional carry.

That's the firearm bill.

- Right, but there aren't the votes for that even among Republicans.

I was sitting in the House when all of a sudden they called this an immediate press panic of veto override, and then we said, "Oh, it's the federal tax break bill."

- We kind of knew that one was gonna get overridden.

- It's still important, but, and again, we talked earlier about the two unaffiliated House members, Cunningham and Majeed, they both voted for it.

- On the constitutional carry, why shouldn't the House put it to a vote and let that amendment override or the veto override?

Why not let it fail in a public vote and put this issue to rest?

- Well, I mean, it's gonna be an issue that plays out, and guns have become a very emotional issue and a charge on that, and with everything else that we have in the space right now, is why go ahead and stoke up that controversy?

Just let it lay, let it sit there.

It's smart politics at this point in time not to force that vote.

- Scott, we have two amendments going on to the ballot, and these veto overrides lingering down low.

If you say the amendment referendum won't drive turnout, then what would veto override attempts do?

- Well, listen, let me talk about the override itself.

I mean, this is just one more case where we're taking public money and supporting private entities, private schools.

The DPI just reported that only 11% of the people receiving the vouchers went to a private school for the first time, and so what's that?

89% of the people were already there, already paying their tuition.

This is not about school choice.

This is about putting money into rich people's pockets who are already paying to have their kids go to private school.

- Does the Stein administration worry about the veto overrides at all?

The statements made by the veto, whether the legislature musters up the three-fifths majorities or not?

- Listen, I think any governor would like to have their veto sustained, so, you know.

- Well, everyone that's been primaried, I mean, I think they're definitely paying attention.

- Last word to you, 25 seconds.

- Yeah, I mean, this is one where I think you see that there may not be the votes for the immigration, the DEI veto overrides, because those Democrats who are now unaffiliated may not be willing to go with Republicans on that the way they were on this veto override this week.

- So, very clearly, what's the high-level veto override attempts remaining?

- Constitutional carry, concealed carry without a permit, and DEI bills.

- DEI, and there's one immigration bill, so five total, and we may see those come up later.

We may see them stay on the calendar all this year and never take a vote.

- All right, thank you so much, everyone, for the show.

Thank you for watching.

More importantly, email me at statelines@pbsnc.org.

I'll read that email.

See you next time.

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