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How does NC pay for government?

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Taxes are the primary source of income for the state of North Carolina.  While many of us focus on the larger taxes, such as personal income, we must remember there are multiple sources of tax income the state uses to fund its daily functions.  Looking at state government, personal and corporate income taxes make up over half of total tax revenue.  The next largest source of income for the state is the sales tax followed by non-tax revenue.  Keep in mind that state taxes are separate from locally collected taxes of a county or municipality.

With over 90 percent of the state’s income coming from tax revenue, it is a major component not only of government, but of our state’s economy.  Taxes, while necessary for a government to function, can become overly burdensome, and in many cases stifle the state’s economy by making work and investment more expensive. 

Having a low tax rate is not the only answer.  While many policy analysts on the right support lower taxes, just as important is to have a fair tax that does not penalize some activities relative to others.  In some cases there is double taxation — for example, with respect to saving and investment — so the elimination of one tax in exchange for a more neutral one would allow for a more even and fair tax system than a simple lowering of the rate.

Prior to the 2013 tax reform legislation, North Carolina’s income tax was tiered, with a top rate of 7.75 percent.  Not only did the legislature lower the overall income tax rate, but they also changed the tax to a flat rate and broadened the base by closing loopholes in the tax code.  While my colleagues at John Locke and I would argue more can be done to improve the income tax, changing the structure of the tax along with lowering the rate was a more comprehensive and economically sound approach to reforming the tax than lowering the rate on its own.

There are still many taxes in the state that have not been reformed and, though small in comparison to the income tax, deserve attention as well.  A great example of a small yet important tax is the manufacturing tax on certain machinery and equipment.  While the tax amounts to less than one percent of the state’s overall tax revenue, it still collects $36 million from North Carolina manufacturing businesses.  A tax on business is actually a tax on our citizens — through workers’ lower wages, consumers’ higher prices, and shareholders’ lower returns — and deserves attention no matter how small the rate or amount collected.

Many businesses in North Carolina already pay a corporate income tax.  So why is there a tax that specifically targets "qualifying purchases of mill machinery, distribution machinery, or parts or accessories for mill machinery or distribution machinery for storage, use, or consumption in North Carolina?"  Business, if taxed at all, should be taxed evenly and fairly across a state.  Specific taxes targeting certain sectors or parts of a business do nothing but create competitive disadvantages.  In this case, the tax unfairly keeps manufacturing businesses from investing and creating new jobs in North Carolina.  Compared to the state’s current policy of offering millions in economic incentives to manufacturing businesses, the removal of this uncompetitive tax would boost employment and incomes at a much lower cost.

In addition to those mentioned above, there are a dozen or so more tax revenue sources for the state.  There are also numerous non-tax revenues that amount to approximately one billion dollars each fiscal year.  The largest source of non-tax revenue is the Judicial Department.  The State bears all costs of the Judicial Department, and in an effort to pay for some of the services provided there are costs and fees for those using the court system.  Except for certain fees that are devoted to specific uses, all superior and district court costs collected are reverted to the state’s General Fund.    

While fees account for a large portion of the non-tax revenue, there are also many transfers that occur from non-General Fund sources each year.  In some cases, there are transfers from trust funds located outside the General Fund into the General Fund for a specific purpose.  One such example is the $217 million transfer from the Highway Fund used as a vehicle sales tax reimbursement.

At the end of the day, North Carolina’s state government is responsible for core government functions and it must levy taxes to pay for those operations.  However, taxes in many cases will stunt economic growth, and legislative leaders need to support policies that create neutral and unbiased taxes along with lower rates.  These two things combined will still allow the state to collect the necessary revenue to support state government, but will also bring higher wages, more jobs, and greater economic opportunity.

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Sarah Curry is Director of Fiscal Policy Studies at the John Locke Foundation. Previously, she worked for the North Carolina State Senate as a research assistant for the chairs of the Senate Agricultural Committee and headed the research efforts for… ...

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