NC Budget and Tax Center

Latest sales tax expansion highlights need for state EITC

Today North Carolinians will begin paying sales tax on various installation, repair and maintenance services on everything from appliances to musical instruments to vehicles. This modest expansion of the sales tax base was included in the state budget passed by state lawmakers last year and represents another step towards aligning the state’s tax code with a more service-based economy. Today, the purchase of services is far more common than the purchase of goods compared to prior periods and this economic activity trend is likely to continue.

The effort to better align the state’s tax code with a 21st century economy is important. However, proponents of the sales tax move have used this good tax policy to fuel far more bad ones. The sales tax base expansion is part of a larger transformation of the state’s tax code that shifts away from the income tax, which is a better tax policy tool for achieving long-term revenue adequacy via a structure that’s based on ability to pay. Furthermore, this shift away from the income tax and to a greater reliance on the sales tax fails to acknowledge the increased tax responsibility on low- and middle-income taxpayers and away from the wealthiest who have reaped the greatest benefits from tax changes since 2013.

State lawmakers continue to be susceptible to special interests and this was highlighted with decisions regarding the expansion of the sales tax. Last year, after passing the state budget that included the expansion of the sales tax base to include more services, lawmakers subsequently approved a separate piece of legislation (HB 117) that exempted services  provided under a “Dealer’s warranty” or a “Manufacturer’s warranty” (see page 9 of HB 117) from sales tax. These services were initially included in the new sales tax base expansion. However, under HB 117, if you purchase a vehicle that includes a dealer or manufacturer warranty that covers repair and maintenance services, then these services are not subject to the sales tax. To the contrary, those with vehicles not covered by a dealer or manufacturer warranty will now pay a sales tax on repair, maintenance, and installation service work done on their vehicles.

The new sales taxes are another reason that policymakers should put in place a refundable state Earned Income Tax Credit (EITC) rather than increase the standard deduction, which appears to be under consideration. As we recently highlighted, an increased standard deduction will not offset the greater sales tax load carried by low- and middle-income taxpayers. Instead the proposed tax policy is poorly targeted and would benefit all who claim the standard deduction (including millionaires) while reducing revenue each year by at least $200 million.

The expansion of the sales tax base to more services must be accompanied by a state EITC that is refundable and thus takes into account the total tax responsibility carried by low- and middle-income taxpayers. Absent this, policymakers continue to make the state’s already upside-down tax code worse and hurt the long-term potential for supporting the state’s economic success.

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