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Budget and Taxation
State Tax Burden
Taxes are the price we pay for government, so a reasonable tax burden is of benefit to the citizens who consume the services they fund.
Unfortunately, the price of government in North Carolina has grown dramatically over the past two decades and is no longer reasonable. The annual tax burden is $1.5 billion higher than it was in 1991, as repeated state tax increases far outweighed any tax cuts enacted during the period (see chart, "North Carolina Tax Burden").
More Taxes, Higher Taxes
North Carolina’s top marginal tax rates on individual (8.25 percent) and corporate (6.9 percent) income are the highest in the Southeast and 9th highest in the nation. North Carolina’s tax on gasoline — 30.15 cents per gallon in Spring 2006 — is sixth highest in the nation. The combined state and local sales tax rate of 7.05 percent is 9th highest among states that also have an income tax.
North Carolina continues to have the highest tax burden in the Southeast: 10.5 percent of personal income in 2006 (see chart, "State/Local Tax Burdens, Southeastern United States").
Research has demonstrated that high taxes discourage out-of-state businesses and individuals from locating in North Carolina. In a 1997 study for the John Locke Foundation, N.C. State economist Michael Walden found that high state income taxes had a large negative impact on job growth and personal incomes in North Carolina.
Recent State Actions
Between 1983 and 1994, the General Assembly approved five major tax increases (including hikes in sales taxes, income taxes, motor fuels taxes, and excise taxes). The last two, implemented in 1990 and 1992, had a combined fiscal impact of more than $1.8 billion in 2001. Subsequent cuts beginning in 1995 saved taxpayers $1.4 billion in 2001, meaning that over the decade, the state tax burden actually rose by about $427 million.
Furthermore, while tax increases in the early 1990s hiked marginal tax rates, the 1990s tax cuts focused primarily on exemptions, deductions, and credits, leaving our high marginal tax rates intact.
The situation worsened considerably from 2001 to 2005. Four of the five state budget bills since 2001 have raised taxes, leaving North Carolinians with an annual tax burden $1.4 billion higher than it was at the beginning of the decade.
Those increases, some permanent and some supposedly “temporary,” included higher taxes on personal income, retail sales, employers, health insurance, satellite television service, and even children’s candy.
Claims that the 2005 budget bill was not a tax increase because it merely “extended” higher income and sales tax rates are misleading, because the bill included other, permanent taxes on consumers and because taxpayers would have paid less if the bill had not been enacted. That is the basic definition of a “tax hike”.
Recommendations
North Carolina policymakers should make it a goal at least to reduce taxes enough to bring North Carolina’s tax burden in line with that of its neighboring states, which would require state or local tax cuts of approximately $1.5 billion. Of particular concern are high income tax rates.
The Locke Foundation’s 2006 budget proposal made the following proposals with those goals in mind:
- Reduce personal and corporate income taxes to a flat rate of 6 percent, saving $891 million.
- Give families $93 million in tax relief for education and health expenses.
- Repeal $483 million in “temporary” sales and income taxes.
- Eliminate $369 million in selective exemptions, deductions, and other tax biases.
To view higher quality graphs, download Agenda 2006 [2.7MB Acrobat].
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