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The Tax Story You Didn’t Hear This Week

The first quarter of revenue data for North Carolina and other states has been released and everyone is scrambling to figure out what the data really mean. For many states the picture is bleak. Around the country the crashing housing market and subsequently declining consumer confidence is making mincemeat of state revenue forecasts. Florida is now in special session to cut property taxes as a way to stimulate consumer spending and Nevada has called for across the board agency cuts.  North Carolina's tax revenues, on the other hand, are coming in slightly ahead of projections.

So, here's what you need to know.  The reason that North Carolina is doing so well is because of our state income tax. In fact, our income tax revenues are up 7.8 percent compared to the same quarter last year and higher than the 4.8 percent increase that was projected. Housing market declines obviously affect property taxes directly because the tax owed is based on the value of the home.  Housing market slumps also affect sales taxes because people buy less stuff typically purhased for new homes, they can't as easily borrow against their equity to buy other stuff and because consumers become less confident overall. The tax that is least affected is the income tax. 

The preliminary recommendations announced earlier this year by the State and Local Fiscal Modernization Study Commission would, if implemented, dramatically shift the state away from relying on income taxes to rely much more on sales taxes.  But a progressive income tax, in addition to being the fairest tax, is the only tax with the ability to grow as fast as, if not faster than, the economy.  The only way to have the sales tax grow with the economy would be to include all services, even health care and business to business services, AND tax food for home consumption.  We do need to modernize the sales tax and make it more fair by broadening the tax base to include more personal services but not as a way to pay for income tax cuts.  That would be clearly hitching our wagon to the wrong horse.

5 Comments


  1. Joseph Coletti

    October 24, 2007 at 12:41 pm

    The problem with the income tax is that it also falls faster than the economy when growth slows. You’ve pointed out in your papers that the income tax is a volatile source of revenue. The General Assembly has not put enough money aside in the rainy day fund, so tax rates will rise again when the economy slows, just as they have done the past two decades. There’s a reason why I call it “spend and tax.”

  2. wafranklin

    October 24, 2007 at 6:32 pm

    Income taxes are volatile? What happens when the subprime market really, really tanks, and sales taxes vanish instantly — you know, people stop buying–Hmmm? And, since not all goods and services are taxed with a sales tax, as pointed out in the article, there is little in comparability between income and sales taxes, save that they bring in money. But, the right is so raptured with their “tax and spend” liturgies that they cannot hope to discuss taxes rationally. It has been the right, well paid for by the corporations and wealthy, which has promoted sales taxes “to share the burden” they say. Truth: they think they do not deserve to be taxed anyway. Republicans and right wingers have made any discussion of taxes toxic. If there is ONE thing we need a frank, fair, open and honest discussion about, it is taxes. But do not expect it from Locke, Civitas, AEI, Heritage, Manhattan or any of the other quasi-academic houses which provide the propaganda of the right. And, the Left has not come to the defense of the working crowd for a long time, instead electing a Republican in disguise, Clinton, and likely to repeat same next year.

  3. Elaine Mejia

    October 25, 2007 at 8:48 am

    Joe Joe Joe – Uou call it “spend and tax” because your time horizon is too short. NC led the nation in tax cuts in the mid 1990’s. By FY 2000 our fearless leaders had cut state taxes by $1.5 billion or more than 10% of the budget at that time! That is far far more than the relatively small tax increases from the 2000’s. There is a volatile part to the income tax to be sure – the part from investment income. But that calls for more rainy day fund savings and not spending that part of the revenue for ongoing expenses – it doesn’t justify relying less on the income tax. Over time the income tax has kept pace with the economy without rate changes – unlike other revenue sources. Broaden your time horizon and you’ll see that’s it’s not “spend and tax.”

  4. Elaine Mejia

    October 25, 2007 at 8:48 am

    Joe Joe Joe – You call it “spend and tax” because your time horizon is too short. NC led the nation in tax cuts in the mid 1990’s. By FY 2000 our fearless leaders had cut state taxes by $1.5 billion or more than 10% of the budget at that time! That is far far more than the relatively small tax increases from the 2000’s. There is a volatile part to the income tax to be sure – the part from investment income. But that calls for more rainy day fund savings and not spending that part of the revenue for ongoing expenses – it doesn’t justify relying less on the income tax. Over time the income tax has kept pace with the economy without rate changes – unlike other revenue sources. Broaden your time horizon and you’ll see that’s it’s not “spend and tax.”

  5. Joseph Coletti

    October 26, 2007 at 12:46 pm

    Elaine, My time horizon is the full decade. Even with the tax rate cuts and the elimination of the state sales tax on groceries (the 2-cent tax is “local”), tax revenues climbed throughout the 1990s and spending kept up. Those tax cuts also did not match the tax increases in the early 1990s.

    Changing the subject a little, but building your agreement that the rainy day fund is important: Given the paltry amount in the savings reserve account still, how could you call this year’s budget bill responsible?

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