Previous Page | Next Page

State tax burden

Taxes are the price we pay for government, so a reasonable tax burden is of benefit to the citizens who consume the services those taxes fund. Unfortunately, the price of government in North Carolina has grown dramatically over the past two decades and is no longer reasonable. Because the state constitution mandates a balanced budget, the tax burden is a function of spending levels. A lower tax burden depends ultimately on lower spending.

Although people continue to move to North Carolina, personal incomes have fallen relative to the national average and to other states in the region after peaking in 1997. The combined state and local tax burden, on the other hand, is now above the national average. North Carolina governments have more taxes and fees available to them than other states in the region, and a wider variety of tax methods often leads to higher total taxes. To offset the harms from a higher tax burden, state and local governments have passed a number of targeted tax breaks for selected companies.

Key Facts

• North Carolina's top marginal tax rates on individual (7.75 percent) and corporate (6.9 percent) income are the highest in the Southeast and 9th highest in the nation.
• North Carolina has the fourth highest tax on beer in the nation.
• North Carolina's gasoline tax is second only to Florida in the Southeast.
• North Carolina's combined state and local sales tax rate of 8.07 percent is eighth highest among all states that also have an income tax.
• North Carolina's estimated tax burden in 2008, 9.8 percent of personal income, is among the highest in the South and 20th among all states.
• Per-capita personal income in North Carolina has stagnated in dollar terms and declined in comparison with regional and national levels.

Recommendations

1. Reduce the tax burden to the regional average or below. A high tax burden can harm economic growth. Targeted tax breaks can sometimes mask the effects of high taxes, but they do little to offset the drag they place on the economy. Getting the tax burden in line with those of surrounding states would remove a hurdle from North Carolina's economy. If the state were able to reduce taxes below the levels of surrounding states, the tax environment would contribute to economic growth.
2. Reduce personal and corporate income taxes to a flat rate of at most 6 percent. The income tax is one of the most noticeable taxes and most manipulated taxes. A lower, flatter rate applied more broadly provides greater certainty and stability to taxpayers and government alike.
3. Give families tax relief for education and health expenses. Those expenses are penalized by the federal tax code. State tax credits or deductions can offset those tax penalties.
4. Eliminate selective exemptions, deductions, and other tax biases. Tax breaks for selected companies and higher taxes for certain activities warp the tax code. Together they raise the tax burden while distorting economic decisions.