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.