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Written by Cedric Johnson, Policy Analyst, NC Budget and Tax Center

North Carolina policymakers have pledged to make revenue modernization a legislative priority in 2013. The policy decisions that they make – and the principles that guide them – will be the foundation for how we collectively pool our resources to educate our children, protect our communities, and support economic opportunity for generations to come.

Since we began, the Budget & Tax Center has advocated for modernizing North Carolina’s tax system to make sure that community needs across the state are consistently met in good and bad times. We have analyzed and advocated for policies that would do so by asking all North Carolinians to contribute according to their means. In our work, it has become clear that tax reform that is truly modernizing can not only address our state’s fiscal challenges but also put the state back on a path to shared prosperity.

To be sure, the Great Recession and the subsequent policy choices made in the face of our state’s fiscal challenges have made all too clear the problems with North Carolina’s revenue system. Tax collections as a percentage of personal income are near a 40-year low for North Carolina, which challenges the state’s ability to adequately invest in important public structures. But beyond its inadequacy for our current and future needs, our tax system is out-of-date, upside-down, and unaccountable.

It is these practical problems —not theoretical ones — that policymakers must address in their efforts to pursue true and comprehensive reform.

Moreover, efforts to modernize the state’s revenue system must be guided by principles that are broadly recognized as indicators of a sound revenue system: adequacy, equity, stability and elasticity are primary among them, with simplicity and efficiency also being important.

  • Adequacy:  A tax system exists to provide for public services demanded by citizens. Both short- and long-term adequacy are critical to ensuring that the tax system can build the infrastructure of services that support communities and the broader economy today and in the future.
  • Equity: How tax policies impact households across the income spectrum as well as how they impact taxpayers similarly situated can impact citizen’s assessments of the fairness of a tax system as well as its ability to support important economic outcomes.
  • Stability: The predictability of a revenue stream is important to the planning and decision-making that policymakers undertake especially with regards to ensuring consistent and long-term investments that promote economic opportunity.
  • Elasticity: How a tax grows with the economy provides an important indication of how well the taxes can keep up with the demand for public services; this is why the elasticity of a tax is important to consider in the design of a tax system.
  • Simplicity: From an administration standpoint, and from the perspective of a citizen, it is important that a tax code be transparent. The degree to which tax loopholes are rampant is key to simplicity, not tax rates themselves – as some would suggest.
  • Efficiency: A tax system should not drive economic decision-making or provide preferential treatment for one type of economic activity over another — for example, investing over earning a wage.

Each of these principles will be highlighted in a series of blog posts this week and each will serve as guideposts against which BTC will assess tax proposals moving forward.

North Carolina cannot afford to forego comprehensive revenue reform that addresses the real problems with our revenue system nor can we afford to get this wrong. A modern tax system will be essential if North Carolina is to remain a leader among states: a leader that, in this century, must redouble our efforts to support an innovative economy that strives to expand opportunity for all.

Durham and Orange county residents are one step closer to accessing more affordable-transportation options. Each of the counties’ Board of Commissioners recently selected April 1, 2013 as the date to begin collecting the half-cent sales tax to support public transit investments. Expanded bus services and new commuter and light rail have the potential of expanding the reach of opportunity by connecting North Carolinians who are poor to the education, employment, and social networks that can help them improve their financial standing.

However, public transit is only helpful to riders if it connects where they live to where the opportunities are available, according to a new report released yesterday by the NC Budget and Tax Center. The success of transit, in turn, rests on increasing access for who regularly use and depend on it: low-income North Carolinians. The report found that more than two-thirds of the state’s workers using transit earn less than $25,000 per year, and a growing share of low-income workers are relying on public transit. The report also found that housing is becoming increasingly unaffordable in the urban cores, where public transit is primarily located and jobs are more plentiful. Read More

In this space yesterday, I provided an overview of how widespread income inequality is in North Carolina. As a brief reminder, North Carolina households in the top fifth hold more income than all of the remaining households combined in the state. Although income inequality hit a modern high last month in the United States, a 2011 study found that a lot of Americans’ hold a perception that does match up with this reality.   

Duke Professor Dan Ariely and Harvard Professor Michael Norton asked approximately 5,500 Americans (whose median income was $45,000) how they thought wealth is actually distributed in the nation. The study found that Americans perceived the distribution of wealth to be more equal than it actually is. In fact, 92 percent of respondents said their optimal level of inequality was even more equitable than their flawed perceptions, meaning they want to live in much more equal communities. Read More