By Elaine Mejia, NC Budget & Tax Center

Call me a tax policy geek if you must, but this holiday season I am thankful to live in a state with a progressive state income tax. And as tax reform discussions in our state continue, I’d like for others to join me in calling for state leaders to strengthen, not weaken our state’s progressive income tax. It’s one of the best things our state has going for it. Here’s why that’s true and what we can do to make it even stronger.

Yes, it tends to be a hard tax to swallow because you see how much you pay every month on your paystub and every year at tax time. With the sales tax, you pay a little here and a little there and you never see the grand total. But you know exactly what you pay in income taxes. But that, from the perspective of tax policy, is one of the really good things about the income tax. It’s transparent. Every household knows how much it pays.

Another good thing about the income tax is that it grows with the economy. As incomes grow, so do tax revenues. As the population grows, so do tax revenues. What’s especially great about that is that state legislators don’t have to tinker with the personal income tax to make sure it brings in enough money year to year. It just grows automatically.

One other benefit of having a state income tax is that it means that Tar Heels send less money to Washington because everything we pay in state income tax is deductible from our federal income tax bills. That’s not true about sales taxes. I don’t know about you, but I’m all for keeping our money right here at home.

The fourth positive point about the personal income tax is that it’s fairer than many other taxes. It has tax brackets, so the more you make, the greater the share of income you pay. If your income declines, so will your tax bill. Sales taxes and property taxes actually work the opposite way – the less money you make, the bigger the share of your income you have to pay.

Because the income tax is the fairest element in North Carolina’s revenue system, it is imperative that the state maintain and strengthen the progressive income tax and continue to rely on it as the cornerstone of the revenue system.

There are three ways North Carolina can strengthen the income tax so it will work of the state well into the future. The first issue lawmakers must address is the base, or the amount of income to which the state income tax is applied. Right now, it’s very narrow, which is why North Carolina’s rates appear higher than those in many other Southern states.

North Carolina is one of only a handful of states that uses federal taxable income as a starting point for state income taxes. Federal taxable income is the amount you come to after excluding some forms of income and applying federal deductions and exemptions. This is especially beneficial to wealthy people, who tend to itemize and take multiple deductions, while many low- and middle-income families use the standard deduction only.

Instead, North Carolina could use adjusted gross income, like most other states, and then subtract state deductions and exemptions. That would broaden the income tax base, making it possible to lower all rates.

In addition, expanding the current system from three income brackets to six brackets would enable state lawmakers to better target tax reductions at middle- and low-income families. This would have the added benefit of ensuring that wealthier families pay a more reasonable share of their incomes in state and local taxes than they do currently. The brackets should also be indexed to inflation so that as inflation pushes up wages, the income range for each tax bracket also goes up. If you’re income doesn’t increase faster than inflation, then neither should your taxes.

In order to increase fairness and target tax reductions at families most in need, the state legislature created the state Earned Income Tax Credit. Expanding that credit – from 3.5% to 10% of the federal credit, for example – would further improve fairness and help families cope with the rising costs of health care, child care, housing, gas, and other necessities of life. Two-thirds of North Carolina families who get the EITC make less than $20,000 a year, so they could use the financial boost.

When it comes to our state income tax it’s too easy to get lost in the details and lose sight of all of its benefits. The future of North Carolina would be well-served by maintaining and strengthening this important source of government revenue.

Elaine Mejia is the Director of the North Carolina Budget and Tax Center