The Senate’s historically unprecedented $1 billion-a-year tax cut passed out of the Finance Committee yesterday, moving steep reductions in personal income tax rates and outright elimination of the corporate income tax one step closer to becoming law. While legislative leaders spoke glowingly about reducing North Carolina’s income tax rates to below those in other southeastern states, they remained conspicuously silent on how those other states have dealt with keeping their own income taxes so low–by increasing property taxes or sales taxes (or both).
This raises an important question—will North Carolina’s state income tax cuts simply lead to higher property taxes and sales taxes?
Let’s look at the facts. Local governments primarily fund their services (like firefighting, public safety, roads, and education) through state support and a mix of property and sales taxes. As we’ve seen over the past two years, declining state revenues have contributed to steep reductions in state aid to local governments—which forces these local governments to turn to property tax and sales tax increases in order to continue provide their services. Likewise, state governments also have to rely on sales tax revenues in the same way.
As a result, states with low income tax rates (or no income taxes at all) often have higher property taxes and sales taxes than those that rely more on income tax rates. According to a recent Center on Budget and Policy Priorities report, states without an income tax have property taxes that are 8 percent to 12 percent above the national average and sales taxes 18 percent to 21 percent above the national average.
Looking across the Southeast, the implications for North Carolina are grim, since—as legislative leaders often point out—all of these states have lower income tax rates, but in 9 out of 10 of them, they also have higher property taxes or sales taxes:
- Residents in 6 out 10 other southeastern states face higher property taxes as a percentage of their income than North Carolinians, and on average the residents of these states pay $338 in property taxes than their counterparts in the Tarheel State in terms of revenues per capita.
- Similarly, 7 out of 10 other southeastern states require their residents to pay more in sales taxes as a percent of income than North Carolina does—an average tax bill $266 higher than what our state residents currently face, as measured by per capita revenue.
- Closer to home, 4 of our 5 neighboring states (Florida, Georgia, South Carolina, and Virginia) have higher property taxes as a percent of income than North Carolina. Residents in these other states pay on average $335 per capita more residents of North Carolina. Tennessee is the only neighboring states with lower property taxes, but instead, has the highest sales tax as a percent of income.
All 5 neighboring states either have higher sales taxes OR property taxes, reinforcing the fact that revenue has to come from somewhere, and that the less revenue raised from personal income taxes, the more it has to come from regressive sources that disproportionately impact low and middle income families.
Given the reality in these neighboring, lower-income tax states, legislative leaders need to grapple with whether property tax hikes will be necessary to replace the revenue lost to their proposed income tax cuts.