How should North Carolina slice the tax revenue pie?

Big news in North Carolina today regarding legislative initiatives to overhaul taxation in North Carolina.  Like most states, we operate under a balanced budget requirement so if you're thinking about changing taxes while keeping spending constant, you've got to offset tax cuts in one place by raising them somewhere else.

The proposal on the table appears to be slashing, maybe even eliminating, the individual income tax and raising sales taxes to make up the revenue.  This is all being done in the name of making the state competitive.  Of course, there are concerns that the sales tax is the most regressive of all taxes, taking much more from the poor as a share of their income.

Does North Carolina have an anomalous tax structure?  Take a look at these two charts, built with data from the Annual Survey of Governments for 2010 -- the most recent data available.  They show how NC's distribution of state and local tax revenue from sales, income, and property taxes compare to the distribution across all states nationwide.  The green slice of the pie in each case represents individual income taxes.

Is North Carolina's green slice too big?  Well, it is bigger than the equivalent slice for the nation as a whole.  The Old North State is more reliant on income taxes than average.

Is North Carolina's red slice -- representing sales taxes -- too small?  Well, it doesn't look that way now does it.  In fact, if you whip out your protractor you'll see that NC is already more reliant on sales taxes than the national average.

So if NC's income taxes and sales taxes are already more burdensome than average, what makes up the difference?  Clearly, North Carolina has a smaller purple slice than the nation as a whole.  Our property taxes are lower than average.

Would it make sense to raise property taxes while cutting both income and sales taxes?  There's actually a decent argument for doing so.  Income and sales taxes both tax something that can leave the state.  But North Carolina's land, with the possible exception of the barrier islands, isn't going anywhere.  Taxes on the value of land are considered to be more efficient for that reason.  There is some argument that the property tax causes problems because it dissuades people from building on their land, but that effect probably doesn't matter too much.

There's another argument against the property tax, namely that some people have no income and don't buy very much but sit on a lot of land.  A property tax might place an untenable burden on them.  Fortunately, smart people have found a way around this sort of problem many times before, by instituting things like homestead exemptions.

One last objection you might have would be that property taxes traditionally go to local, not state, government.  There are exceptions, though.

If North Carolina were to scrap the income tax entirely and raise property taxes to make up the lost revenue, just over 50% of the state's tax revenue would come from that source.  That's not too far off the figure for Texas, a no-income-tax state where 45% of tax revenue comes from the property tax.  So I wouldn't write this off as a completely crazy idea.

 

Comments

[Lizzy V]

It's a completely crazy idea.

[Lizzy V]

To clarify: YOUR idea is not completely crazy; the idea of getting rid of the income tax is completely crazy.