NC Budget and Tax Center

State and local tax policies can advance or block racial equity. How is N.C. doing?

In a major report released today by the Center on Budget & Policy Priorities, researchers present a review of tax policy choices that have historically blocked opportunities for people of color and the ongoing challenge of assuming that tax policy is “race-neutral.”

The findings are particularly important for North Carolina.  Our state gets a mention in the report for recent tax cuts that have fueled the racial divide in our state.  Beyond that, North Carolina has failed to heed the lessons of our history—designing tax policy with the wealthy and white in mind rather than with the possibilities of connecting more people to the wealth-building potential of a good education, affordable home, reliable and quality health care, and thriving communities.

Indeed, of the three major recommendations from the report below, North Carolina has almost completely failed.

  • Strengthen State Tax Structure: Ensure that households with high incomes pay a larger share of their income in state and local taxes than households with lower incomes — the opposite of the upside-down tax systems in place in 9 of every 10 states today. Most states’ tax structures actually worsen racial and ethnic inequities because the tax structures are regressive and households of color are more likely to have lower incomes and less wealth than white households.
  • Raise Revenue to Invest in Overcoming Inequities: Raise sufficient revenue for high-quality schools in all communities and for other investments in education, infrastructure, health, and the like, and target spending to help overcome racial and ethnic inequities and build an economy whose benefits are more widely shared.
  • Improve the “rules of the game”: Improve the fiscal policy “rules of the game” so lawmakers don’t face artificial constraints that prevent them from raising more revenue from wealthier residents or to finance public investments that can promote broadly shared prosperity.

Notably, the recent passage of a state constitutional amendment in N.C. that caps the income tax rate at 7 percent places an arbitrary barrier that prevents progress toward advancing racial equity and the potential to boost North Carolina’s economy.

However, North Carolina policymakers still have many tools that they can and should pursue to advance the shared goal of expanding economic opportunity and an enhancing equity; this includes aligning the state tax code with ability to pay; adequately and equitably funding core services such as schools and health to connect Black, brown and white households to opportunity; and removing artificial constraints on tax and spending decisions such as the recent practice by legislative leaders of arbitrarily constraining spending and leaving needs unmet.

You can read the full report here.

NC Budget and Tax Center, race

Low-income taxpayers in NC pay more of their income in state and local taxes each year than the richest taxpayers

A new study released today by the Institute on Taxation and Economic Policy (ITEP) finds that the North Carolina tax system is regarded as the 31st most regressive because low-income taxpayers are asked to pay more in state and local taxes as a share  of their income compared to the rich.

The study, Who Pays? A Distributional Analysis of the Tax Systems in All 50 States, analyzes tax systems in all 50 states. The analysis evaluates all major state and local taxes, including personal and corporate income taxes, property taxes, sales and other excise taxes. According to their findings, the lowest-income North Carolinians pay 1.5 times more in taxes as a percent of their income compared to the state’s wealthiest residents. As illustrated below, the lowest 20% of North Carolina taxpayers pay 9.5% in total taxes as a percentage of their income, while the top 1% of North Carolina taxpayers pay 6.4% in total taxes as a percentage of their income.

Source: Institute on Taxation and Economic Policy

The wealthiest North Carolinians continue to benefit most from our growing economy and the state tax code is supercharging those gains. It’s not unreasonable to ask the highest-income residents and corporations to pay a share of state and local taxes that gets closer to the share that taxpayers with poverty-level incomes pay or that seeks to balance what is now an upside down tax code.  It makes certain that those who spend more of their income have more income to spend locally. It is also good for our fiscal position as a state.  It turns out, more progressive rate structures are better able to keep up with a growing economy and thus fund the services and infrastructure that support thriving communities.

Sales taxes play a critical role in the regressive and consequently inequitable nature of the North Carolina tax system. Like most other states, North Carolina relies on sales and excise taxes (30.7% of the 2018-2019 approved budget) as a primary mechanism to raise revenue. However, in North Carolina, sales and excise taxes are the most regressive taxes when compared to income and property taxes. The lowest 20% of North Carolina taxpayers 6.1 percent in sales taxes as a percentage of their income while the top 1 percent pays less than 1 percent in sales taxes as a percentage of their income.

Source: Institute on Taxation and Economic Policy

 Equally important are the racial implications of regressive state and local tax systems. Tax codes worsen the racial wealth divide when they tax low-income people at higher rates than the wealthy, tax income derived from wealth (e.g. capital gains) at a lower rate than income derived from work, and heavily rely on consumption taxes. A recent study on the Tax Cuts and Job Act from ITEP and Prosperity Now report regarding changes to the federal tax code report similar findings— communities are color benefit the least from tax systems that reward the wealthy, who are overwhelmingly White. Moreover, tax cuts in recent years in North Carolina have consolidated the racial wealth divide by delivering the greatest share of net tax cuts to White taxpayers.

State lawmakers have control over how their tax systems are structured. This latest Who Pays data makes clear that our state’s failed tax-cut experiment is maintaining a tax code that privileges the few at the expense of us all.

Martine Aurelien is a Policy Fellow at the Budget and Tax Center, a project of the North Carolina Justice Center. Her work focuses on equitable economic opportunities, tax policy, race equity, and systems level policy solutions. 

NC Budget and Tax Center

Trump tax cuts are the “power tools” of the nation’s racial wealth divide

The federal tax code is one of the most powerful tools that drives the economic outcomes that we seek. Unfortunately, instead of utilizing this “power tool” to help low and middle income earners build wealth, the newly enacted Tax Cut and Jobs Act (TCJA) exacerbates an already massive racial wealth divide by rewarding  existing white wealth over the economic security of households of color, a disparity that reflects longstanding racial economic inequality in the United States. A new report from Prosperity Now and the Institution on Taxation and Economic Policy (ITEP) details the racial implications of TCJA.

Here are the THREE key findings from that analysis:

On average TCJA tax cuts benefit White earners of nearly all income statuses: “Of the $275 billion in tax cuts the TCJA provides to individuals this year, $218 billion (80%) goes to White households. On average, white households will receive $2,020 in cuts, while Latino households will receive $970 and Black households receive $840.”

TCJA tax cuts provide pronounced benefits for top earners who are overwhelmingly White: “Middle class households receive $2.75/day in tax cuts while White households in the top 1% receive $143/day; While 1.2% of White families earn enough to place them among the top 1 percent of earners, just 0.4% of Latino and Black families are members of this group.”

Communities of color, especially Asian households, stand to benefit the least: “Asian households fall in the bottom 20% of income-earning households, who receive just $70 from the Tax Cuts and Jobs Act in a year, or less than $0.20 per day.”

In enacting the Tax Cuts and Jobs Act, Congress has chosen to use this economic power tool to further buttress wealthy White households. Without change, TCJA tax cuts stand to increase the racial wealth divide and make it nearly impossible for households of color to catch up to White wealth.

 

Martine is a State Priorities Policy Fellow at the Budget and Tax Center, a Project of the North Carolina Justice Center. Her work focuses on economic equity and systems level policy change.