Creating a Fair and Adequate Revenue System

The Justice Center’s NC Budget & Tax Center is the leading organization doing research on the state revenue system. The BTC evaluates tax policies based on two important principles:

Fairness – Under North Carolina’s current tax system, the wealthy pay a smaller share of their incomes in taxes than middle-income people do. In addition, some large multi-state corporations based in North Carolina pay no state income taxes whatsoever, even though they make billions of dollars in profits.

Creating a fairer tax system will require the wealthy and corporations to live up to their responsibilities to the state, while making sure that taxes are not a barrier for middle- and low-income families working to move up the economic ladder.

Adequacy – North Carolina is growing by leaps and bounds, and its roads, schools, and agencies are feeling the strain. The state needs a reliable flow of revenue that will cover both today’s needs and essential investments for the future.

The first step must be to “broaden the base, lower the rate.” That means expanding the range of economic activity captured by the revenue system, which will allow the state to decrease certain tax rates and still bring in more revenue. In addition, requiring the wealthy and corporations to pay their fair share will increase the tax system’s adequacy because their incomes are growing much faster than those of working families.

Why NC’s Revenue System Doesn’t Work

North Carolina’s state and local tax system was designed during the Great Depression for an agriculture- and manufacturing-based economy. Nearly all transactions involved tangible goods, like clothes, food or equipment. As the state’s population and economy grew, so did the number of transactions and the incomes of residents; therefore, growth in tax revenue was automatic.

Today, North Carolina is a hub of medical and technological research and industry, numerous large multi-state corporations call the Tar Heel state home, and many transactions involve services or new technologies. North Carolina's tax system isn't designed for such a system, so parts of the economy that should reasonably fall under the tax code do not. As a result, everything that does fall under the code is taxed at a higher rate, which is unfair to most individuals and small businesses.

The state's tax system is also unfair in that it lets the wealthy contribute less than low- and middle-income families do. The lower a family's income is, the more likely it is to spend almost all of its money on the basics of life – and all of those things, with the exception of food, are taxed. As a result, the lowest-paid workers in North Carolina pay 10.7% of their income in taxes, compared to only 7.1% for the wealthiest people.

This lack of fairness significantly contributes to the lack of adequacy in North Carolina's revenue system. Corporate profits and the incomes of wealthy individuals are growing much faster than the wages of working families. If North Carolina’s revenue system required fair contributions from corporations and millionaires, tax revenues would more closely follow the growth of the economy, making the system more adequate.

State and Local Tax Reform Recommendations

These recommendations interact with one another and should be implemented simultaneously.

Income Tax

  • Maintain primary reliance on progressive income tax
  • Have a minimum of five income brackets and index them for inflation
  • Broaden the base of income to which the rates are applied
  • Lower all rates, but substantially lower the bottom rates
  • Enhance refundability of credits for low-income taxpayers 

Sales Tax

  • Expand to cover more personal services
  • Eliminate ineffective caps and exemptions
  • Lower the rate

Corporate Income Tax

  • Eliminate ineffective exemptions and credits
  • Adopt combined reporting strategy for eliminating loopholes

Property Tax

  • Require more frequent revaluations or annual indexing of property values
  • Create refundable circuit-breaker credit

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