May 21, 2013
RALEIGH — Lost in the debate about tax reform in North Carolina is the more than $2 billion in excise taxes the state collects in a single budget year. A new John Locke Foundation Spotlight report documents the state’s various excise taxes and offers suggestions to help state lawmakers avoid raising those taxes in the future.
“North Carolina excise taxes generated $2.4 billion in the 2010-11 budget year, amounting to 13 percent of all tax revenue collected,” said report author Sarah Curry, JLF Director of Fiscal Policy Studies. “Historically, state excise tax increases have been coupled with recessions or state budget shortfalls. There is no good reason for lawmakers to permit another rate hike in the future.”
A larger appropriation to the state’s savings and reserve account, the “rainy day fund,” would help lawmakers avoid the temptation to raise excise taxes again during the next budget crunch, Curry said. That’s a key recommendation in her report. She also calls for increased transparency in the use of excise taxes.
“In a democracy, in order to make intelligent decisions in the voting booth, people need to be aware of how much their government is costing them,” Curry said. “This is possible only if they are aware of the taxes they are paying. Excise taxes lack transparency.”
Curry offers an example involving the fuel tax, the largest source of excise tax collection in North Carolina. The state gasoline, or motor fuel, tax raised about $1.2 billion over the last 10 years. Total fuel excise taxes reached $1.5 billion.
“If you buy five gallons of gas at $3.15 per gallon, your bill is $15.75,” Curry said. “Unless you know that the federal excise tax is 18.4 cents per gallon and the North Carolina excise tax is 37.5 cents per gallon, you won’t know that $2.80 of your gasoline purchase price went to pay hidden excise taxes.”
More transparency would help, Curry said. “Receipts for items on which an excise tax is levied should list clearly the base price of the item, as well as the tax,” she said. “This will allow the taxpayer to see how much is paid in each transaction.”
The report differentiates between a sales tax, based on a percentage of the price of the item sold, and an excise tax of a flat amount per item. “Sales taxes are applied to a wide base of products, whereas excise taxes are applied to items specified by lawmakers,” Curry said. “These taxes often are tied closely to moral or social considerations, so they often receive less resistance than others.”
Excise taxes often violate the key economic principle of neutrality, Curry said. “In a free society, the tax system should not be used to punish activities that are disfavored by politicians or to reward activities that politicians consider virtuous. It’s unfortunate that excise taxes have been used for exactly these purposes nationwide for more than 220 years.”
North Carolina has been levying excise taxes since 1921, when the state enacted its first tax on motor fuels. No other excise tax came into play until lawmakers started taxing tobacco, alcohol, and soft drinks in 1969. The latest excise tax rate increase came in 2009, when a budget shortfall linked to the Great Recession gave politicians cover to enact a tax hike, Curry said.
The report offers details about nine different types of excise tax, covering cigarettes, various forms of alcoholic beverage, motor and alternative fuels, piped natural gas, dry cleaning solvent, real-estate transfers, unauthorized substances, white goods such as refrigerators and washing machines, and solid waste disposal.
Curry addresses the argument that an excise tax — especially the gasoline tax — could be considered a form of user fee. “So long as revenues from the gas tax are used to build and maintain roads, these taxes are consistent with principles of liberty and neutrality, if not transparency,” she said. “But much of North Carolina’s current gasoline tax goes instead to the state’s General Fund or is spent on items other than highway construction and maintenance. If excise taxes are to be treated as a user fee, then collections should be used accordingly.”
There’s no good reason for most items now subject to an excise tax to be taxed at a greater rate than products subject to the state sales tax, Curry said. “The multiple layers of taxation are disproportionate and nontransparent, and they represent an unwarranted interference with taxpayers’ decision-making process,” she said. “Indeed, the government should respect taxpayers’ freely made choices, even if a large proportion of society frowns upon those choices.”
Sarah Curry’s Spotlight report, “Exorcising Excise Taxes: Bringing Transparency to Hidden Taxes,” is available at the JLF website. For more information, please contact Curry at (919) 828-3876 or [email protected]. To arrange an interview, contact Mitch Kokai at (919) 306-8736 or [email protected].