The 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 those taxes fund.

Unfortunately, the price of government in North Carolina has grown dramatically over the past two decades and is no longer reasonable. Even with the expiration of some of the 2001 temporary tax hikes, state taxes have climbed more than $1.3 billion under Gov. Mike Easley.

More Taxes, Higher Taxes

North Carolina's top marginal tax rates on individual (7.75 percent) and corporate (6.9 percent) income are the highest in the Southeast and ninth highest in the nation. The beer tax is fourth highest in the nation. North Carolina's gasoline tax is second only to Florida in the Southeast.

The combined state and local sales tax rate of 7.05 percent is ninth highest among states that also have an income tax. North Carolina's estimated tax burden in 2008, 9.8 percent of personal income, is among the highest in the South and 20th among all states.

Research has demonstrated that high taxes discourage out-of-state businesses and individuals from locating to a state. Although North Carolina continues to perform well economically, per capita personal income since 2001 has not kept pace with past growth.

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. In each of those five years, the General Assembly enacted budgets that increased the tax burden — by roughly $500 million in 2001 and then more than $1 billion annually in the following years.

The increases, some permanent and some temporary, included higher taxes on personal income, retail sales, employers, health insurance, satellite television service, and even children's candy. It took until 2006 for the temporary income and sales tax hikes to begin matching their names, although half of the sales tax increase is now permanent.

Recommendations

North Carolina policymakers should make it a goal at least to reduce taxes enough to bring our tax burden in line with that of our neighbors, which would require state or local tax cuts of approximately $2 billion. Of particular concern are high income tax rates.

The Locke Foundation's 2007 budget proposal made the following proposals with those goals in mind:

1. Reduce personal and corporate income taxes to a flat rate of 6 percent, saving $908 million.

2. Give families $295 million in tax relief for education and health expenses.

3. Eliminate $321 million in selective exemptions, deductions, and other tax biases.