Busting Tax Myths: Personal income tax no more volatile than other major state taxes

North Carolina policymakers have pledged to make revenue modernization a legislative priority in 2013. Earlier today at a press conference, North Carolina Senate President Phil Berger indicated that there will indeed be a revenue reform package. At this point, it is not entirely clear which specific policy decisions and principles will guide the leglative leadership’s revenue plan.

With that said, Senator Rucho, the Co-Chair of the Senate Finance Committee, is touring the state and pitching a proposal that would eliminate the state’s personal and corporate income taxes. One of the arguments used in support of this proposal is that sales tax revenue is less volatile than personal income tax revenue. This is one of many persistent tax myths, however. And if this tax myth is used to guide policy decisions, the result could be even more problems with North Carolina’s tax code.

For sure, sales tax revenues are volatile in the face of economic downturns. This is especially true when the sales tax fails to include services. While Senator Rucho and others have claimed that the sales tax can deliver greater stability than other revenue sources, it is important to note that research demonstrates that the personal income tax is no more volatile than the sales tax in the long-term.

As reported by ITEP in this report, it is also important to keep two other facts in mind:

  1.  “Over the long term, progressive income taxes are the most reliable revenue source available to states, displaying more robust growth in the long run than sales, property or excise taxes; and
  2. “States faced with revenue volatility have a variety of sensible fiscal management strategies available to mitigate the impact of volatility.”

Minimizing volatility and increasing stability is an important principle to guide revenue reform. Greater stability can minimize the extent to which ups and downs in the economy can compromise adequate support for key public structures like schools, hospitals, colleges and universities. However, eliminating the personal income tax will only result in a diminished capacity to fund key public investments in the long-run. The issue of volatility would be better addressed through such tools as Rainy Day Funds, which are contributed to in good times so that they can smooth revenue in downturns.

12 Comments

  1. david esmay

    January 16, 2013 at 8:05 pm

    Eliminating personal and corporate income taxes is just another misguided right wing nut ALEC inspired scheme to shift more of the tax burden onto the poor and middle class. The right think regression is reform, it follows the rest of their ant-American ideology.

  2. Frank Burns

    January 17, 2013 at 5:59 am

    Did you hear the latest tax and spend scandal coming from Charlotte? The Charlotte city council wants the state to approve a 1% increase in the prepared food tax to fund improvements to Panthers Stadium. They just came up with that beauty behind closed doors. This would have to be approved by the General Assembly. I don’t believe the GA are in the mood to approve raising taxes on anybody much less for a frivolous reason like fixing up the Panthers stadium, I hope.

  3. Alex

    January 17, 2013 at 8:01 am

    Our current tax policy has not worked in this state, so david we should keep doing the same thing. I think that’s the definition of insanity in my opinion.

  4. love my state

    January 17, 2013 at 8:33 am

    Don’t worry Frank, unless you live in Mecklenburg County, and possibly even just Charlotte, you won’t have to worry about that 1%, which most of us here don’t mind paying to ensure that the benefits that come from having the Panthers in our home town continue. The revenue the team generates is hardly frivolous.

  5. Frank Burns

    January 17, 2013 at 10:27 am

    I do live in Mecklenburg County and will fight this tax increase with all my efforts. I have already communicated with my State House and Senate Representatives and asked them to deny the City of Charlotte this approval. I call it frivolous because even if the money is spent for improving the Panthers Stadium, there is no guarantee the team will stay in Charlotte anyway. Considering the City has infrastructure needs, does it make sense to make the stadium more luxurious at the expense of sidewalks?

  6. James Protzman

    January 17, 2013 at 11:15 am

    Turning to Raleigh to punish local initiatives is the height of Republican hypocrisy.

    I’m assuming Ferret Face won’t mind when the federal government in Washington decides to punish the Pope administration for illegal gerrymandering, voter suppression, and denial of health coverage here in North Carolina.

    What happened to all the happy talk about home rule?

  7. Frank Burns

    January 17, 2013 at 11:38 am

    Turning to Raleigh to correct poor local decisions is the height of good sense. I’ve noticed when taxes go up, the Advocay Groups are as happy as clams but squeal like stuck pigs the moment you try to cut taxes. To them taxation is a one way street. Reminds you of the sign in front of Dante’s Inferno, “Abandon All Hope All who Enter Here”.

  8. david esmay

    January 17, 2013 at 12:22 pm

    Alex, de-funding the state is the definition of insanity. Other than lining the pockets of corporations, not a single piece GOP right wing legislation has improved the level of unemployment or changed the business climate in regards to hiring in this state, improved wages, or increased the quality of life, in fact the results have been just the opposite. That is the definition of ignorance and willful ignorance on economics, science, education, and basically reality, has been a fixture of the the right for the last 32 years.

  9. Tim

    January 17, 2013 at 2:15 pm

    “ALEC” says Nebraska (Hieneman), “ALEC” says Louisiana (Jindal)… Never heard of em! When is this ALEC virus going to be exposed?

  10. Alex

    January 17, 2013 at 4:59 pm

    “Other than lining the pockets of corporations, not a single piece GOP right wing legislation has improved the level of unemployment or changed the business climate in regards to hiring in this state, improved wages, or increased the quality of life, in fact the results have been just the opposite. ”

    David, I actually think your statement above perfectly describes the last 4 years under Obama and Governor Perdue. The poor have gotten significantly poorer, and we have sunk further in debt while doing nothing for the middle class. I think you said it well.

  11. david esmay

    January 17, 2013 at 5:08 pm

    In spite of every effort by the recalcitrant GOP members of congress, the President is succeeding and will continue to do so. The GOP on the hand is a dying party with a dying demographic and a morally and economically bankrupt philosophy.

  12. Alex

    January 18, 2013 at 10:25 am

    So you call the mess we have in this country a success david ! And I guess you believe in the tooth fairy also