“Thom Tillis raised taxes on 80 percent of North Carolinians”

–voiceover of new Senate Majority PAC ad attacking GOP Senate candidate Thom Tillis (R)

As GOP voters chose North Carolina House Speaker Thom Tillis as their nominee for the high-stakes Senate race, the pro-Democratic group Senate Majority PAC rushed out an ad that appears to have been filmed at Tillis’s victory party. Arguing that Tillis was not right for North Carolina voters, the ad narrows in on a sweeping tax package negotiated under Tillis’s watch in 2013, which the ad says provided “tax cuts for the wealthy and big corporations….even kept breaks for private jets and yachts….raised taxes on 80% of North Carolinians.”

In others words, the ad seeks to portray Tillis as a tool of wealthy, not the middle class. We will focus mostly on the eye-popping claim that the tax bill raised taxes on 80 percent of North Carolinians.

The Facts

A big feature of the tax bill was to eliminate a three-tier tax system, ranging from 6 percent rate for low-income workers to 7.75 percent for the wealthiest North Carolinians, and instead introduce a flat 5.75 percent rate for all taxpayers.  In general, across-the-board cuts in tax rates tend to benefit wealthier taxpayers—who after all pay the majority of taxes. (As we have noted before, the top one percent of taxpayers pay nearly 40 percent of federal income taxes collected.)

The new law did eliminate a number of loopholes to help finance the tax cut, including a $20,000 cap on deducting property taxes and home mortgage interest that was aimed at the owners of large homes and estates. But lawmakers, under pressure from the state’s boat building industry, did not eliminate a $1,500 cap on the sales tax for boats and planes. That’s where the ad gets its line about keeping such tax breaks.

But what kind of tax reform, billed as a tax cut for most people, actually raises taxes on 80 percent of the state’s residents? That’s where the ad goes off kilter.

The ad cites a report from the left-leaning Budget and Tax Center, which is affiliated with the North Carolina Justice Center. But the data in the report comes from the Institute on Taxation and Economic Policy. Meg Wiehe, ITEP’s state tax policy director, actually works out of North Carolina and has seen the ad. “We have not said that 80 percent of taxpayers will pay more under this plan,” she said in an interview.

In fact, when the plan is fully phased in, Wiehe says that ITEP’s analysis of the income tax portion of the law shows that 49 percent of taxpayers will get a tax cut and 35 percent will get a tax increase; 16 percent would see no change. (This analysis includes the impact of lawmakers deciding to allow the expiration of the state’s earned income tax credit, which benefits low-income workers. Some analysts might argue the EITC is not a tax cut, but that’s another story. ITEP also calculated the results without the impact of the EITC. )

How could Senate Majority PAC get this so wrong? It has to do with the tyranny of averages–and a misreading of the data.

ITEP calculated the impact of tax law on seven different income levels—the lowest 20 percent, second 20 percent, middle 20 percent, fourth 20 percent, next 15 percent, next four percent and then the top one percent. Breaking up the top quintile into three parts significantly boosts the average incomes, making the benefits appear to flow dramatically to the top one percent. (The average income of the fourth 20 percent is $67,000 and the average income of the top one percent is $940,000. Imagine who pays more in taxes—and thus would benefits most from a tax cut.)

The ITEP analysis then shows that the average tax change within those income groups. For the bottom 20 percent, with an average income of $12,000, the average taxpayer would see an increase of two dollars. (Yes, you read that correctly; it’s not a typo.) For the second 20 percent, with an average income of $25,000, the average tax payer would pay an additional nine dollars. (Yes, that’s correct–just nine dollars.)

But within those categories, there are huge differences. In the lowest income category, 29 percent of taxpayers would have an average tax increase of $121 and 32 percent would have an average tax cut of $103. Even among the top 20 percent, a significant portion of taxpayers—about 25 percent—would experience a tax increase since, as we noted, some tax breaks for the wealthy were eliminated.

ITEP further added in the “average” impact of changes in various sales and franchise taxes, which slightly boosted taxes for every income group, even the top one percent. But the amounts were modest—ranging  from $22 to $97 for all income groups except the top one percent.

Add that up, and “average” tax change for people in the bottom 80 percent was a modest increase  (from $23 for the lowest 20 percent to $74 for the fourth 20 percent). In fact, that’s at most 20 cents extra in taxes per day–on average.

For some bizarre reason, Senate Majority PAC assumed this meant that everyone in the bottom 80 percent had a tax increase, when in fact, there are winners and losers in every income group—and more people got a tax cut than tax hike.

In response, Senate Majority PAC spokesman Ty Matsdorf said:  “Here are the facts: folks struggling to make ends will be hit hard by Thom Tillis’ reckless and irresponsible plan. Meanwhile, he bent over backwards to protect tax breaks for private jets and yachts. The fact is, Thom Tillis is wrong for North Carolina families.”

The Pinocchio Test

On its face, it is pretty absurd to think that a tax reform bill that cut rates and eliminated tax loopholes ended up raising taxes on 80 percent of the people in the state. Broadly speaking, the wealthy do appear to gain more from the 2013 tax overhaul, but they also pay the lion’s share of income taxes. And 35 percent of the people appear to face a tax increase, including some of the wealthiest people in the state–not 80 percent, all at the bottom.

Our old adage applies: If a factoid sounds too good to be true, it probably is. Senate Majority PAC should have checked the facts before rushing on the air with this ad.

Three Pinocchios

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