Taxes Matter and How We Collect Them Does Too

A Memo to Reporters and Editors from the NC Budget & Tax Center during Tax Season

RALEIGH (April 10) — As tax season winds to a close, there will likely be multiple opportunities to write about taxes and their impacts on families, communities and the state.

The following memo is designed to help reporters in the development of their stories by providing some key facts about why taxes matter and why how North Carolina collects taxes matters too.

  • Taxes provide the means to invest in educating our children, protecting our neighborhoods, supporting the well-being of the most vulnerable, maintaining our quality of life and keeping our state competitive. The budget shortfalls that began mid-year in FY 2008-2009 have resulted in significant reductions to all areas of the state’s investment.  Compared to the start of the Great Recession, North Carolina invests 10 percent less in K-12 education, 9 percent less in universities and community colleges, 4 percent less in justice and public safety, and 10 percent less in health and human services. These underinvestments have had real, visible impacts on communities, classrooms, families, workers and businesses.[1]
  • The collapse in revenue during the Great Recession drove successive budget shortfalls in North Carolina.  North Carolina has historically collected revenue at or above 6 percent of state personal income or all North Carolina residents’ income put together.  As a result of the Great Recession, revenue collections dropped to 4.8 percent of state personal income.[2]  While policymakers put in place a temporary tax package to raise revenue in 2009, that effort was not enough to close the entire budget shortfall. Furthermore, these temporary taxes were eliminated last year by policymakers in favor of a cuts-only approach and severe over-reliance on one-time money.
  • To make sure we can adequately invest in making our communities healthy and competitive, North Carolina needs a modern revenue system that can grow with the economy is needed.  Revenue modernization has long been discussed in North Carolina and there exists broad consensus on the system’s problems.  Our state’s outdated revenue system was designed for the economy of the 1930s, not the 21st century. As a result, it doesn’t benefit from economic activity where it now grows and occurs, such as in service industries and online commerce.
  • North Carolina’s revenue system also continues to require more from low- and moderate-income individuals and families than the state’s wealthiest people. In 2009, a low-income household contributed $9.50 for every $100 in income while a household in the top 1% of income contributed just $6.80 for every $100 income.[3] As such, our current revenue system asks North Carolinians of low and modest means to contribute a 40 percent greater share of their annual income than wealthy North Carolinians to support public investments that benefit businesses and communities across the state.

How we modernize our revenue system matters.

  • We should maintain a diversified revenue system, including income taxes as well as sales taxes. Just as smart investors recognize the importance of having diverse investments in their portfolio, a revenue system built on multiple types of taxes has been demonstrated to provide greater stability in times of economic uncertainty and provide more adequate revenues over time. If, as some policymakers suggest, North Carolina eliminated the personal income tax, the state would lose more than $9 billion in revenue – more than half of the state’s total tax revenues in any given year. A state revenue loss of this magnitude would be unsustainable in either the short or long term.
  • We should make sure the system is based on ability to pay. A revenue system based on ability to pay can yield the same revenue with modest taxes on the state’s wealthiest as what would be very high taxes on the state’s lowest income households.  One critical tool in the effort to make the state’s revenue system more equitable is the state’s Earned Income Tax Credit which is set to expire at the end of the year if policymakers don’t act.
  • We should ensure that the system can grow with the economy. Maintaining the personal income tax and broadening the sales tax to services where much of today’s economic activity occurs are two ways to make sure the economy doesn’t outpace our revenue system, leaving North Carolina unable to meet its current obligations or invest in its future. When paired with a robust Rainy Day Fund, such a system would be better positioned during economic downturns and shouldn’t require constant increases in the rates to raise the same amount of money.

It is time for North Carolina’s policymakers to build a modern revenue system.  The blueprint for such a design, however, must be guided by principles that can yield the best results for North Carolina’s future.  Adequacy and ability to pay must be the pillars against which all decisions are measured.

For more on the Budget and Tax Center’s revenue modernization plan, click here.

[1] Calculations by the NC Budget and Tax Center in inflation-adjusted dollars.

[2] McLenaghan, Edwin, February 2010. How We Got Here: North Carolina’s Broken Revenue System Partly to Blame for Severity of State Revenue Shortfall.  BTC Brief: NC Justice Center, Raleigh, NC.

[3] Institute on Taxation and Economic Policy, November 2009. Who Pays? A Distributional Analysis of the Tax Systems in all 50 States. Third Edition. Figures include the federal offset of state and local personal and property taxes as itemized deductions.