In recent weeks, lawmakers in North Carolina have proposed a number of tax reform plans that would abolish the corporate and personal income taxes and shift the state’s revenue base to a consumption tax. In doing so, these proposals would immediately eliminate 60% of the state’s annual revenue, almost certainly requiring significant increases in the sales tax or deep spending cuts in order to be “revenue-neutral”—that is, raise the same amount of revenue as under the current system.
North Carolina’s budget essentially relies on three separate “pillars,” which together account for 90% of the total tax revenue generated for state government. The first pillar is the Sales Tax—as its name suggests, this tax is levied on most goods (except food) at the point of sale and comprises 32% of the state’s revenue. The personal income tax is the second and largest pillar financing the state budget, the source of 53% of the state’s total revenue. This tax is levied on the wage, investment, and business income earned by the state’s households. Accounting for 6% of the state’s revenue base, the final pillar is the corporate income tax, which is levied on C-Corps, S-Corps, and other incorporated for-profit entities that conduct business activities within North Carolina.
As the graph indicates, removing these two pillars of the state’s tax system would eliminate 60 percent of the revenue that currently funds state government. In turn, this would increase reliance on the sales tax contribution to state revenue, an approach that both generates significant concerns over regressivity (since low-income families spend a disproportionate share of their earnings on necessities subject to the sales tax) and would likely fail to raise sufficient revenue to adequately finance key public investments (like workforce training and infrastructure) critical in promoting economic growth. In fact, previous research has demonstrated the importance of the income tax in meeting the needs of state government. Without this pillar holding up North Carolina’s tax system, state government would likely generate inadequate revenues, resulting in deep spending cuts to these core growth-enhancing investments.
The personal and corporate income taxes play an important role in ensuring that state government revenues are adequate to meet the public investment needs of the 21st century economy.