Low- and Moderate-Income Workers Pay More than the Wealthy,
but Policy Changes Could Improve Fairness
The poorest 20% of North Carolina households pay a larger share of their family incomes in state and local taxes than any other income group, while the wealthiest households pay the smallest share. This is one of the key findings from a new study released today by the North Carolina Budget and Tax Center.
“As a whole, North Carolina’s tax system is regressive, meaning it makes low-income families pay more of their income in taxes than wealthy people do,” explained Meg Gray, policy analyst for the North Carolina Budget and Tax Center and author of Who Pays Taxes in North Carolina? (Hint – It’s Not Who You Think). “The state’s new refundable earned income tax credit helps, but that credit will have to be increased substantially to offset the overall lack of fairness in the state’s revenue system.”
The report finds that:
- North Carolina households in the bottom 20%, with an average income of $10,000, pay 10.7% of their incomes in state and local taxes. The top 1%, with an average income of $970,000, pays only 7.1%. This means the responsibility of paying local and state taxes falls hardest on those with the least ability to pay.
- Sales and excise taxes account for the majority of taxes paid by the bottom 40% of non-elderly taxpayers, while income taxes account for the majority of taxes paid by the wealthiest 20%.
According to Gray, “The wealthiest people have the fastest-growing incomes, but the tax system primarily targets working families who have seen their wages stagnate and have the least ability to pay. North Carolina’s budget problems will only get worse as the gap between the rich and poor widens in America, unless the legislature makes some key policy changes.”
Strategies for improving tax fairness, and thereby making the revenue system more adequate for the state’s budget needs, include the following:
- Increasing the percentage of the state’s refundable earned income tax credit
- Expanding the base of the sales tax to include more personal services (which are used more by the wealthy) and using the revenue gains to lower the overall sales tax rate
- Creating a refundable circuit-breaker credit for low-income homeowners and renters that would allow them to offset some property taxes