by Brian Balfour
Senior Vice President of Research, John Locke Foundation
Inflation is a tax by another name – it erodes the value of your paycheck and your savings.
And thanks to inflation, many North Carolinians may find themselves owing state taxes, even though they find themselves financially worse off.
Over the past year, North Carolinians have seen their average wages increase by 6.2%. But at an annualized rate of 7.7%, inflation has increased at an even faster clip. This means that in spite of nominally increased wages, the average NC worker has not kept pace with the rising cost of living, and as such are financially worse off than they were a year ago.
Making matters worse for many of these workers is the fact that their increased wages may push them above the state’s “zero tax bracket.”
North Carolina’s personal income tax code offers a standard deduction of $10,750 for single filers and $21,500 for married filing jointly. That means if you fall under that income threshold, you owe zero state taxes.
Income above that threshold will be taxed at 4.99% (with that rate falling in future years).
So tax filers previously with income below the standard deduction who saw their income increase over the past year may be pushed above that threshold and now will owe state taxes. But, as noted above, many of those who are earning more nominal income are nevertheless financially worse off because their income didn’t keep pace with inflation.
So not only are these people punished by the inflation tax, but are now forced to fork over income taxes to the state despite their standard of living having decreased in real, inflation-adjusted terms.
This is a double financial penalty that is especially harmful to low-income households being devastated by inflation.
But there is an easy fix for this problem. North Carolina legislators can index the standard deduction to inflation, so it rises along with the calculated increase in the cost of living. This would put NC in line with what the IRS already does with federal taxes.
There’s no reason low-income households should be penalized twice by inflation.