The proposed Senate tax plan and the recently released House tax plan aim to eliminate the personal income and corporate income taxes. These two taxes raise more than $11 billion and represent over half of the state’s total tax revenue. Among the contentions made by proponents of cutting and eliminating income taxes is that doing so will make the state’s revenue system more stable.
A 2013 report by the Center on Budget and Policy Priorities (CBPP) finds that, over the long-term, income taxes grow more than other state taxes and better reflect economic performance. Importantly, the income tax is not significantly more unstable than sales tax when viewed over time. And the benefit of the long-run growth of the income tax is lost with its elimination. The CBPP report highlights that from 1990 to 2007 state spending grew by 3.3 percent per year, while the personal income tax and sales tax grew by 3.3 percent and 2.4 percent per year, respectively.
The House and Senate tax plans would increasingly rely more on the sales tax to replace revenue lost from eliminating income taxes. As the CBPP report highlights, the sales tax is less responsive to economic growth than an income tax over the long-term and by eliminating income taxes, the state will not fully capture the upside during economic boom periods.
In previous blog posts, I highlight the importance of maintaining a progressive personal income tax and the corporate income tax as components of the state’s tax system. In combination with this evidence, the recent report by the Center on Budget and Policy Priorities further builds the case that eliminating income taxes is a losing strategy and does not promote economic opportunity for all North Carolinians. Not only will families be harmed, but the foundations of economic growth will also be threatened.