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Who pays taxes in North Carolina?

This tax season marks the final year North Carolina taxpayers will file their income taxes under the state’s old tax code. By next year the increased tax load for many North Carolina taxpayers will be apparent as a result of the tax plan passed by state leaders last year.

Today, the Budget & Tax Center released a report [1] that highlights how the tax plan passed last year shifts the responsibility of paying for public investments to middle- and low- income taxpayers while providing generous tax cuts to the wealthy and profitable corporations. The report highlights various elements of the tax plan that fundamentally changes the state’s tax system and, subsequently, who pays taxes in North Carolina.

The tax plan passed last year replaces the existing graduated personal income tax rate structure with a flat tax rate that will largely benefit wealthy taxpayers who will now pay a much lower income tax rate. A number of tax provisions that benefit middle- and low-income families – such as the personal exemption and child and dependent care credit – are eliminated under the tax plan.

Other changes under the tax plan that contribute to the tax shift include huge corporate income tax rate cuts that will benefit only a small share of the state’s businesses. A portion of the corporate tax cut benefits with actually flow to corporate shareholders outside of the state. Meanwhile, expanding the sales tax to include various services means that those who spend a greater share of their income on goods and services – particularly middle- and low-income families and individuals – will pay more in state and local taxes.

Furthermore, the tax plan allows the state Earned Income Tax Credit (EITC) to expire [2], which results in a tax increase for more than 900,000 North Carolina families across the state’s 100 counties, who will claim the tax credit for the last time this tax season. This tax credit is a proven tool for offsetting the negative impact of sales taxes on low-income workers.

Overall, around two-thirds of net benefits from the full tax plan will flow to the top 1 percent of income earners in North Carolina, the report [3] highlights.

Proponents of the tax plan claim that the tax changes will create jobs and boost the state’s economy. However, evidence shows no clear relationship between tax cuts and positive state-level economic performance. The recent experience in Kansas serves as a good example. After passing huge tax cuts in 2012 that shifted the tax load to the state’s middle- and low-income taxpayers, Kansas’ subsequent economic performance has been lackluster [4].

The tax shift resulting from the tax plan does not represent a fair tax system that promotes shared economic prosperity for all North Carolinians. Instead, it will undermine the state’s economy and the tax system’s ability to fund essential public services [2]. And for that, we all lose under the tax plan.