Improving North Carolina’s sales tax, which is currently narrow, outdated, and unstable, would be instrumental in helping modernize the state’s revenue system, a new report shows.
The sales tax is exemplary of many of the issues with North Carolina’s revenue system, according to a report released this morning by the Budget and Tax Center, a project of the North Carolina Justice Center, as it is not aligned with the economy, it raises an inadequate amount of revenues, and it asks more from those with the least ability to pay. The state sales tax in North Carolina represents nearly 30 percent of the state’s total revenue each year, with the states sales tax generating $5.9 billion in revenue last year. However, the sales tax is outdated – as it doesn’t apply to a vast majority of service transactions – as well as regressive, meaning it asks more from those with the least ability to pay, the report finds.
“North Carolina’s sales tax is out of line with current consumption patterns and activity in the market,” said Alexandra Sirota, Director of the Budget and Tax Center. “For decades, consumer purchasing in North Carolina has shifted away from goods to services, most of which are not subject to sales tax. The result is that the tax is applied to a smaller percentage of household transactions, to which lawmakers have responded by raising the rate in order to collect similar revenue levels.”
Low- and moderate- income families spend a greater share of their income on things subject to sales tax, contributing to the greater overall share of their income paid in state and local taxes than wealthier households, she added.
Some North Carolina legislators are considering a shift away from the personal and corporate income tax and toward a revenue system that primarily relies on consumption-based taxes which would require greater contributions from low- and moderate-income households in total taxes, the report said. Such a shift would increase the overall state rate to 13.88%, if revenue neutrality is the goal, and require a 5.6% increase in taxes for low-income taxpayers with a tax cut of 4% for the top 1% of North Carolina households.
There are means of modernizing the sales tax that would make it stronger and fairer, as well as a source of revenue, the report finds. The report suggests broadening the base of the sales tax by including all consumer services would allow the rate to be reduced if combined with other revenue modernization efforts in other tax sources.
“As North Carolina considers how to modernize the state’s revenue system, it will be critical to tackle the problems with the sales tax to ensure that the system as a whole is fair and adequate,” Sirota said. “Such steps should include broadening the base of the sales tax, strengthening the Earned Income Tax Credit, and ensuring that the sales tax does not become the primary source of revenue for the state.”
The report can be found at this link.