NC Budget and Tax Center

Flat Tax Equals Eroding Revenue

A major detail has been ignored in the rush to adopt a flat income tax rate. With a flat income tax, revenues will grow more slowly over time, leaving North Carolina unable to maintain its most important investments, such as education, which has already suffered from significant spending reductions in recent years. That means we will have to raise other taxes to make up the difference or suffer the consequences of underfunding our priorities.

In the presentation to House Finance of the bill, Representative Lewis stated that the income changes–including most significantly the adoption of a flat tax–would hold revenue growth to about 4.5 percent per year. If revenue had grown that slowly over the past 20 years, North Carolina would have been unable to make  many of its most important investments. In 2007, for instance, North Carolina would have had nearly $5 billion less for North Carolina’s schools, colleges and universities, roads, public safety, and other services. That $5 billion is more than our budget combined for the Department of Health and Human Services, Department of Commerce, Department of Justice, Indigent Defense Services PLUS funds to address the NC pre-K waiting list and half of the child care subsidy waiting list.

Even this year, House Plan and Revenue Growthrevenues would have been $1 billion less—that’s what we pay for the entire community college system. Moving forward with a flat tax will leave North Carolina unable to maintain its most important investments, which are the very building blocks of a strong economy and strong future.

The income tax is more than half of North Carolina’s general tax revenues. If it is slashed, as it would be under the various tax cut plans, we will have to raise other taxes, further cut services, or both, to make up for the revenue loss. This reality is already reflected in some of the tax plans. The House plan, for example, expands the number of services subject to the sales tax and maintains the current sales tax rate to help afford the shift to a flat tax. But even with that expansion, the plan would bleed the North Carolina of of $1.5 billion in revenues over the next five years, or $500 million annually once the plan is fully implemented. Unless we rely solely on cuts to make up that difference, sales and property taxes are likely to go up.

Moving forward with a flat tax will leave North Carolina unable to maintain its most important investments, which are the very building blocks of a strong economy.

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