Policy & Progress article: The Great Tax Shift

By Alexandra Forter Sirota, Director of the NC Justice Center’s Budget & Tax Center

North Carolina lawmakers are seriously considering proposals that would increase the tax load on middle- and low-income North Carolinians and cut taxes for the wealthy and big, profitable corporations.

The state’s tax system is already upside-down. Recent data from the Institute on Taxation and Economic Policy shows that taxpayers who earn less than $60,000 pay more than 9 percent of their incomes in state and local taxes, while the top 1 percent, earning more than $800,000, pays less than 7 percent.

The proposals would make this worse by increasing the state’s reliance on the sales tax. Middle- and low-income families spend more of their incomes than wealthy households do, so they pay more in sales taxes. These households are primarily spending out of necessity: to buy clothes for their children, household supplies and other basic needs. While wealthy North Carolinians certainly buy those things too, the share that these expenditures take up of their incomes is much smaller. So an increase in the sales tax hits working families much harder.

On the flip side, there’s the personal income tax, which is a progressive tax. The tax rate increases with the taxpayer’s income.

The current proposals at the General Assembly would reduce or eliminate the personal income tax (a huge tax cut for the wealthy) and would make up some of the lost revenue by increasing the sales tax. The net result—the wealthy would pay much less in taxes while middle- and low-income families would pay more. That’s the Great Tax Shift. Lawmakers want to shift the tax load from wealthy North Carolinians onto working families.

Creating a Long-term Budget Mess

Current economic trends suggest this tax shift would be problematic not just on the grounds of equity but also in regards to the long-term adequacy of the state tax system. Income growth is concentrated at the top; indeed, the incomes of the richest 5 percent of households grew by 8.8 percent while those of the poorest fifth fell by 3.7 percent from the late 1990s to the mid-2000s.

The long-term adequacy of the state’s revenue stream is undermined when it must attempt to raise revenue from those whose income is stagnate—the middle class and low-income families. As the state’s needs grow, the revenue simply won’t keep up.

And tax cuts for the rich help no one but the rich. They do not lead to job creation. In fact, the 65+ years of historic evidence shows tax cuts for the rich at the federal level contribute to income inequality, and they don’t boost savings, investment or employment growth. States that have adopted such regressive tax agendas have not experienced greater job growth.

On the flip side, mainstream research finds that progressive income taxes, under which the wealthy pay more than low- and middle-income earners, are beneficial to state economies. States with relatively high income tax rates have outperformed states without income taxes in terms of economic growth in recent years.

The Dumb Idea that Refuses to Die

Why then are we back to arguing about tax proposals based on trickle-down economics?

Because there are lawmakers who believe a greater tax load for low- and moderate-income is justified because they receive government benefits. They forget that rich people also drive on roads, send their children to public schools, and are safer with dangerous criminal behind bars. Moreover, the proponents of the great tax shift greatly exaggerate the government benefits most poor people in North Carolina actually receive. The vast majority of low-income families do not receive all the services they are eligible for, in part because there are not enough funds to allow that. Moreover, these services aren’t luxuries—they prevent families from going homeless or hungry.

But lawmakers who support increasing taxes on working families apparently think people living in poverty can afford to pay for a tax cut for the rich. We doubt most people in North Carolina agree.

The great tax shift will do nothing to fix the current problems with our tax code but will deliver greater income inequality. The underdog in this story is the 60 percent of taxpayers earning less than $50,000 who will see their tax contributions increase in order to pay for a tax cut for those at the top.

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