January 29, 2013

RALEIGH — There’s no reason to believe a new report’s claim that North Carolina’s tax system takes a “much larger share” from middle- and low-income families than from families with higher incomes. The John Locke Foundation documents how the misuse of selected federal tax data leads left-leaning analysts to the wrong conclusions.

“It’s one thing to make a philosophical argument against North Carolina’s existing tax system, or against reforms designed to help make that tax system more competitive with neighboring states and more consistent with policies promoting economic growth,” said JLF President John Hood. “It’s another thing to use deeply flawed analysis to prop up a discredited myth. The claim that North Carolina’s existing tax system is steeply regressive is just wrong.”

Hood’s comments respond to Wednesday’s release of “Who Pays?” The left-leaning Washington-based Institute on Taxation and Economic Policy compiled the report, billed by advocates as a “distributional analysis” of tax systems across the country. The N.C. Justice Center’s Budget & Tax Center is promoting ITEP findings in North Carolina.

The report contends that — grouped by income — the bottom 20 percent of North Carolina households pay an average overall effective tax rate of 9.8 percent. That figure purportedly combines all state and local income, property, sales, and excise taxes. The middle 20 percent pay an average of 9.4 percent of their income taxes, according to the report. Meanwhile, the top 1 percent of households pay “only” 6.5 percent.

Data points have changed, but ITEP and BTC have used the same flawed methodology in the past, Hood said. He documented problems with a previous ITEP report in a November 2011 column posted at CarolinaJournal.com.

“This analysis faces two problems, one major and one minor,” Hood said. “The minor problem is that when you break out the top 20 percent of taxpaying households into smaller subcategories, in order to heap scorn on those evil filthy rich, you should note that the number of households in the top 1 percent is extremely small — a few thousand at most. The actual people in those households change quite a bit over time, reflecting one-time events such as the sale of a primary residence.”

“Plus, why break out the top 20 percent into subcategories and not break other quintiles into subcategories, too?” Hood added. “For example, the ‘poorest of the poor’ within the bottom 20 percent do not pay 9.8 percent of their incomes in taxes. Many are highly dependent on untaxed government or charitable benefits and services. In short, it makes more sense just to stick to quintiles for apples-to-apples comparisons.”

Sarah Curry, JLF Director of Fiscal Policy Studies, documents the larger problem for JLF’s primary blog, “The Locker Room.” “The report claims our state and local tax rates are regressive, yet its calculations include a federal offset variable, which is the only way to make that claim remotely plausible,” Curry writes.

“The federal offset should not be included for multiple reasons,” she adds. “Wealthier families pay higher federal income taxes than poorer families, even when accounting for itemized deductions, keeping their total tax burden in line with other income groups. In the 2012-13 fiscal year the overall state budget is 34.9 percent financed by federal dollars, primarily funded by the wealthy. Independent studies concluded the poorest 20 percent receive approximately $8 in government services for every $1 they pay in taxes, proving most government programs redistribute income from the wealthy to the poor.”

Curry recalculated the numbers to remove the federal tax data. “The truth is that when looking only at state and local taxes by quintile, there is not much difference for 80 percent of North Carolinians,” she writes. “These numbers vary slightly from the report; in checking basic arithmetic, errors were found in almost every column.”

The adjusted numbers are:

Lowest 20% — 9.8 percent
Second 20% — 9.5 percent
Third 20% — 9.6 percent
Fourth 20% — 9.7 percent
Highest 20% — 9.1 percent

The wealthy do have a slightly lower tax burden than the poor, seven-tenths of a percentage point, which is not overly regressive, Curry writes. “Keep in mind that the top 20 percent are taxed vastly higher than lower- and middle-income families at the federal level,” she said. “The left needs to present a more rational and appropriate argument. The claim of an overly regressive tax structure is just not true for North Carolina.”

Whatever steps North Carolina policymakers take to reform the state’s tax code, they should not buy into myths about the code’s treatment of low-income and higher-income households, Hood said.

“Repeating a myth over and over doesn’t make it true,” he said. “North Carolina’s tax code is not steeply regressive. Putting out another report touting the same misleading information about the state’s tax burden doesn’t make the arguments any stronger.”

For more information, please contact John Hood at (919) 828-3876 or [email protected]. To arrange an interview, contact Mitch Kokai at (919) 306-8736 or [email protected].