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Who really pays for taxes in North Carolina?

By Staff
Two workers arrive at the office at 8 a.m. By 8:34 a.m., one of the workers has earned enough money to pay his share of state and local taxes for the day. The other worker must keep going for another 17 minutes to earn enough to pay his share. The difference between these two workers is their income, but not in the way you may think.
In North Carolina today, it is the state’s poorest taxpayers who pay the highest share of their incomes in state and local taxes and the wealthiest taxpayers who pay the least. State and local taxes pay for many of the things that keep North Carolinians safe and enhance their quality of life. These include physical structures like roads, jails and school buildings and services like health care, education, and restaurant inspections.
Because these investments benefit everyone, each North Carolinian should contribute an appropriate share of his or her income to pay for them. It should be a common goal that all North Carolinians pay similar shares of their incomes in state and local taxes. A good case can also be made that wealthier taxpayers should contribute a greater share of their incomes.
However, the situation today is the exact opposite of this ideal. In 2007, the bottom 20 percent of North Carolina households, with an average annual income of $10,000, paid 10.7 percent of their incomes in state and local taxes. In the same year, the top 1 percent, with an average annual income of $970,000, paid only 7.1 percent. The responsibility of paying local and state taxes falls hardest on those with the least ability to pay.
North Carolina’s state and local tax system on the whole is unfair, or “regressive.” North Carolina relies primarily on income, property and sales taxes to fund state and local services. The income tax is the largest of North Carolina’s combined state and local revenue sources. This helps to lessen the overall “regressivity” of the state’s tax system, but it is not enough to offset the impact that the sales, excise and property taxes have on the poorest households. A fair tax system should be structured so that the combined impact of all tax sources results in households with higher incomes paying the greatest share of income in state and local taxes.
The “regressivity” of North Carolina’s tax system has a serious impact on the state’s ability to collect adequate revenues. The majority of state income is concentrated in the wealthiest households, and the incomes of the top 1 percent are growing at a much faster rate than any other income category. Because North Carolina’s state and local tax system primarily targets working families who have seen their wages stagnate and have the least ability to pay, state revenues are in danger of lagging behind. Unless the state makes some key tax policy changes, we will certainly face serious budget problems in the future.
Changes that would require wealthy households to pay their fair share are essential to the state’s success. If we were to change the state and local tax system to require the wealthiest 1 percent of households to pay as much of their income as the poorest 20 percent do, the revenue yield would have been $589 million in 2006.
One way to improve tax fairness is to expand the sales tax base to include more personal services (used more by the wealthy) and use the revenue gains to lower the overall sales tax rate. Another is to increase the size of the Earned Income Tax Credit to offset the impact of the sales tax on low-income households.
Changes can also be made to the property tax to benefit low-income homeowners and renters. The preferred approach, used in more than 30 states, is a refundable “circuit breaker” credit that would return a portion of property taxes low-income homeowners and renters pay through a refundable credit on their state income tax form.
Ideally, when lawmakers consider any changes to North Carolina’s current revenue system, they should account for the impact the change will have on low- and moderate-income taxpayers. If fairness is not at the center of every tax policy debate, reform efforts will fall short on achieving long-term adequacy. Focusing on fairness will help the state meet its needs without relying on those with the least to contribute.