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Don’t be misled: Boosting sales tax would hurt low- and middle-income families

Advocates of a state tax overhaul are doing their level best to distract attention from the central truth that the plan would raise taxes [1] on North Carolinians earning less than $51,000 a year and hand a significant tax cut to the top 20 percent.

The authors of a Civitas Institute report—which advocates abolishing the state personal income tax and replacing most of the lost revenue with a higher sales tax on a wider variety of goods and services—acknowledge that low- and middle-income households would pay more since they spend more of their income on products subject to sales taxes than wealthier households do. But they claim that this concern is overblown. They use several arguments to justify the tax shift, none of which stand up to scrutiny.

One of their central assertions is that some low-income people get government benefits, which apparently means that people living in poverty can afford to pay for a tax cut for the rich. We doubt most people in North Carolina agree. The proponents of a higher sales tax greatly exaggerate the government benefits most poor people in North Carolina actually receive. To bolster their case, they cite services available to families in Pennsylvania and appear to assume that every household eligible gets all of the services. But this is simply not the case in North Carolina. The vast majority of poor people do not receive all the services they are eligible for, in part because there are not enough funds to allow that.

Moreover, these services aren’t luxuries. They can mean the difference between getting by and going homeless or hungry. Yet, the Civitas report argues that low-, middle- and upper-income households are similar when it comes to the level of goods they consume, once income taxes and government services are taken into account. This also is far from the truth. Would you rather be poor or rich?

As income inequality has grown over the past three decades—with earnings rising at the top of the income scale while remaining flat or falling for middle- and low-income households—spending patterns have changed too. Simply put, middle- and low-income families are spending more of their overall income on necessities, and saving less, compared to wealthier families.

Another argument that emerged recently to justify a tax hike on low- and middle-income families is that some people with low incomes are retirees with substantial savings in the bank and a home that’s paid off. In other words, low-income seniors can afford to pay for a tax cut for the rich. Again, we doubt most people in North Carolina agree. If a senior is collecting a huge amount of investment and pension income, they’ll get a tax cut from this plan along with other rich people—at the expense of low-income seniors and those with truly middle-class incomes.

Advocates of ditching the income tax also assert that North Carolina’s economy will be stronger if we replace it with a sales tax, and that will be good for everyone. There’s no evidence that this is true. In fact, mainstream research refutes the idea that progressive income taxes, under which the wealthy pay more than low- and middle-income earners, are harmful to state economies. States with relatively high income tax rates have outperformed states [2] without income taxes in recent years.

Don’t be fooled by these smoke-and-mirrors tactics. All of this adds up to one unmistakable conclusion: moderate- and low-income families will fall further behind if North Carolina policymakers embrace a tax overhaul that increases and expands the sales tax while abolishing the income tax. They will end up paying more of their overall earnings in taxes, while wealthier households that could afford to pay more will get a substantial tax cut.