BTC BRIEF: North Carolina's "Tax Swap" Gives Biggest Breaks to the Wealthiest, Undermines Public Investments for All

By Cedric Johnson
Policy Analyst, Budget & Tax Center
April 2016

Efforts to rely more on the state sales tax and less on the income tax to support public services have shifted tax obligations to less affluent North Carolinians, while saving the wealthiest the most money, and reduced resources available for public investments that build a strong economy.

The deliberate shift began in 2013 and gained momentum in 2015 with enactment of state income tax cuts accompanied by increasing the number of goods and services subject to sales tax. In both instances those who benefitted most were well-off people and profitable corporations.

Expanding the range of purchases on which the sales tax is levied is not inherently bad policy. Over time, purchasing habits in North Carolina and the nation have shifted dramatically. People used to spend more money on goods than services; today it is the other way around. To bring in the revenue needed to support schools, public health services and other public necessities, having a sales tax that reflects the modern economy makes sense. So to the extent that North Carolina now taxes more services, the state is acting responsibly.

The problem exists with the manner in which the sales tax expansion has occurred. When expanding the sales tax isn’t combined with other important measures that promote equity in the state’s tax system, the share of income paid in state and local taxes goes up for North Carolinians struggling to make ends meet and goes down for
the wealthiest.

Part of the reason for the harmful inequity in North Carolina’s tax system is that the lower a household’s income the greater share of that income goes to buy things, meaning the share of income paid in sales taxes goes up. In general, people who make less money have less to save, so much more of what they earn goes to purchases. The wealthy, on the other hand, are able to save or invest a large share of their income, which is not subject to sales tax.

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