2016 Fiscal Year State Budget, NC Budget and Tax Center

More “clarity” adds to tax shift taking place in North Carolina

North Carolinians are paying more in sales taxes than they did a few years ago. Lower income North Carolinians continue to pay a larger share of their income in state and local taxes compared to the wealthy. This is a result of state leaders’ deliberate efforts to create a state tax system that relies much more on the sales tax and much less on income taxes. Consequently, the tax load has shifted to low- and middle-income taxpayers and away from the state’s highest income earners.

North Carolinians now pay sales tax on a number of activities and services that were not subject to sales tax prior to 2014. In recent years, the sales tax has been expanded to include more than 40 services that were either not taxed at all or only partially taxed prior to tax changes passed by lawmakers. And the list of services subject to sales tax will likely grow under tax changes pushed through by state leaders that give large income tax cuts to the wealthy and profitable corporations and swap in the sales tax, which disproportionately hits middle- and low-income taxpayers. And because state leaders have not put in place a strong Earned Income Tax Credit (EITC) to offset this swap, this means most North Carolinians will likely see even more of their income going to state and local sales taxes.

For the current fiscal year, North Carolinians will pay more than $500 million in additional revenue as a result of lawmakers expanding the sales tax base. For the upcoming fiscal that begins July 1st, nearly $640 million in additional revenue will be raised from expanding the sales tax.

The additional sales tax revenue pales when compared to the cost of income tax cuts passed in recent years, however. Costly income tax cuts for the wealthy and powerful have resulted in a significant loss of revenue – $1.5 billion in the current year and $2.1 billion in the upcoming year – that otherwise would have been available for public investments. This is happening at a time when many areas of the state budget – public schools, affordable higher education and health services for the elderly and poor – remain unaddressed.

Yet state leaders continue down their rigid path of tax cuts over investment. Both the House and Senate budgets include more tax cuts that reduce available revenue. Furthermore, the Senate’s budget expands the sales tax base to more services as a result of what state leaders claim is a simple clarification of sales tax changes that have already been passed. However, under the Senate’s budget this clarification means North Carolinians will pay at least $35 million more in additional sales taxes during the upcoming fiscal year.

Images of services subject to sales tax_blog (final)

The inconsistent and evolving way in which state leaders are ushering the tax shift is not likely to stop. The additional sales tax expansion included in the Senate’s budget is a carved out portion of another bill that Senate leaders have introduced. Under this bill, additional services that would be subject to sales tax would result in North Carolinians paying at least $140 million in additional sales taxes – in addition to the more than nearly $640 million in additional sales taxes we will pay during the upcoming fiscal year.

The tax shift occurring in North Carolina is real, and the consequences have long-term implications. A tax system that gives tax breaks to the wealthy and powerful corporations while shifting the tax load to low- and middle-income taxpayers is not a tax system that works for everyone, or anyone for that matter. An income tax that is based on ability to pay is critical to ensuring that revenue is available for schools, main streets, and air and water quality, for example.  And that is why we will all lose.

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