In 1992, a prominent Democratic State Senator was talking to a small group of people waiting for a political rally to start when the subject turned to an effort by progressives to repeal the state sales tax on food that had been imposed in the early 1960s by Governor Terry Sanford to raise money to improve the state’s struggling education system.
The Senator said he didn’t support that idea because “the poor need to pay taxes too.” That was a common view in the General Assembly at the time, though not said in public very often.
The state portion of the sales tax on food was finally repealed in the late 1990s, but the sentiment that the poor don’t pay their fair share of taxes is still alive and well in the General Assembly and dominates much of the public policy debate.
Despite the adoption of an Earned Income Tax Credit last session, most of the talk about tax cuts always starts with efforts to reduce taxes on corporations and the wealthy. Last year lawmakers gave the richest two percent of state taxpayers a break by letting a temporary income tax increase expire, while at the same time making a temporary increase in the regressive sales tax permanent.
A new report from the North Carolina Budget and Tax Center finds that the claim that the poor don’t pay their fair share of taxes is actually true, though not in the way many legislators believe. The poor pay more than their fair share.
The BTC report finds that that poorest 20 percent of households in the state, with average incomes of $10,000 a year, pay 10.7 percent of that income in state and local taxes. The wealthiest one percent pays 7.1 percent of their income. The average income of that group of taxpayers is $970,000. The analysis includes both the EITC and the tax break for the wealthy passed last session.
The report includes a graph that shows that the percentage of income paid in state and local taxes is inversely proportional to income level. This is true despite the state’s relatively progressive income tax and is largely a function of the reliance on the narrowly applied sales tax and the property tax imposed by local governments.
North Carolina taxpayers can also deduct state taxes paid from their federal taxes, but most low-income filers don’t have enough expenses to itemize their deductions and therefore don’t get the break.
There’s plenty of more fascinating information in the report, including a breakdown of who pays each of the major taxes assessed by the state and local governments, and recommendations to improve the fairness of the state’s tax system.
The fundamental message is one that should be the foundation of every tax debate in the General Assembly. The overall tax system in North Carolina is regressive, the poor pay a far higher percentage of their income in taxes than the rich.
The report comes on the heels of other reports that also shatter pieces of conventional wisdom in the current policy debate.
Site Selection Magazine’s latest economic ranking has North Carolina fourth in the country in the number of new or expanding projects it attracted. The state ranked first among states with metro areas between 200,000 and one million people.
The Triad was recognized as the top small metro region in the country and the Lexington-Thomasville area and Statesville-Mooresville were the top two rural areas.
The findings are not new, but ought to finally make the pile of evidence that North Carolina is business friendly too high to ignore.
Two weeks ago, a senior executive with Ernst & Young presented lawmakers with a study that showed North Carolina’s business taxes are the lowest in the Southeast and among the lowest in the nation measured as a percentage of the state’s economic activity.
Also this week, The Pew Center on the States recently gave North Carolina a B-minus for its budget process, but the page summarizing the findings included a table of facts. North Carolina ranks 10th in state spending, not a surprise given the size of the state’s population. But state spending per capita in North Carolina ranks 34th.
That’s quite a list when you add it up. The poor pay a higher percentage of taxes than the rich. The state continues its dominance in economic development. Business taxes are among the lowest in the country and the state spends less per capita than 33 states.
So much for all the bluster about bloated budgets and crippling taxes. Now let’s move on to solving real problems.