Progressive Voices

On June 3rd, the North Carolina Senate passed a bill that, if also passed by the House of Representatives and signed by the governor, would do away with North Carolina’s gift tax. Eliminating North Carolina’s gift tax would have implications for the state’s estate tax collections, the ability of the state to finance services now and in the future and the fairness of the state’s tax system.

The gift tax is applied when assets such as money or property are given from one person to another if the value of the gift exceeds certain allowable exclusion amounts. The amount of the tax varies depending on the type of relationship between the donor and the recipient and the size of the gift. There is no tax on gifts to spouses and the tax is lower on gifts to direct descendents such as children and grandchildren than to those less closely related to the giver.

It’s important to recognize that the gift tax already has in place generous exclusions that would allow all but the wealthiest residents of the state to give away sizeable sums of money tax free. Individuals are allowed to give up to $12,000, or $24,000 per couple, tax free to each direct descendent every year. In addition to this annual exclusion amount, individuals are also able to give an additional $100,000, or $200,000 per couple, in the course of a lifetime tax free.

Because North Carolina has an estate tax, it is important for the state to have a gift tax as well. Without a gift tax in place, families can reduce the size of their estates by giving away portions of their estates to descendents prior to their death. In doing so, they reduce the taxable value of their estate and thereby can transfer large sums of wealth over time to family members in order to avoid estate tax liability.

Not only would eliminating the gift tax threaten the solvency and effectiveness of the state estate tax there are other reasons to question the wisdom and timing of this proposed policy change.

There is very little new state tax revenue this year. There is scarcely enough revenue to give teachers and state employees a decent raise. Community colleges are busting at the seams and faculty pay ranks near the bottom nationally. There are 29,000 children of low-income working parents on the waiting list for assistance with their child-care bills. Probation officers in some urban counties have caseloads of more than 100 offenders each. Public school budgets for diesel fuel to run bus routes are going through the roof. And so on and so on.

Meanwhile, the wages of the typical North Carolina family are not increasing. After adjusting for inflation, the median hourly wage in North Carolina was the same in 2006 as it was in 2000: $13.49 per hour. Moreover income inequality in North Carolina is increasing. The incomes of North Carolina’s richest five percent of families have grown much faster than those of all other families over the past 20 years. Top families now earn, on average, 12 times’ more than the poorest ones and four times’ more than middle-income families.

Finally, low and middle-income taxpayers pay the greatest share of their incomes in state and local taxes in North Carolina. Research shows that the bottom 20% of income earners in North Carolina pay approximately 10.7% of their incomes in state and local taxes while the state’s top 1% of income earners pay 7.1%.

In the face of these budgetary and economic challenges, the North Carolina Senate’s proposal to use $20 million to give a tax break to the state’s wealthiest taxpayers seems particularly misguided. Any tax cuts considered this year should reward work, not wealth.

Elaine Mejia is the Director of the N.C. Budget and Tax Center

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This entry was posted on Tuesday, July 1st, 2008 at 12:39 pm and is filed under Progressive Voices. You can follow any responses to this entry through the RSS 2.0 feed.