RALEIGH – I’ve written before about the fact that, thanks to Gov. Mike Easley and the Democratic majority in the General Assembly, North Carolina’s state and local tax burden is now far higher than that of any other Southeastern state and is higher, for the first time in recent memory, than the national average.
(A recent Spotlight paper by my colleague Roy Cordato has a useful table on the subject; it’s located here.)
But arguably more important than the average tax burden – the total amount of taxes collected divided by total personal income – is how North Carolina ranks in tax rates. That is, how much in income taxes, to take one example, do North Carolinians have to pay for every additional dollar of income?
As can be demonstrated easily by now, some two decades after the supply-side revolution, marginal tax rates influence personal decisions to work, save, and invest. They help to determine the overall output of an economy by tipping the balance between spending one’s time enhancing income through work or spending one’s time expending income through leisure, family time, volunteering, etc. Particularly at the high end of the income distribution, marginal tax rates can take so much of an additional dollar of income (more than half when you consider federal and state income and payroll levies) that anyone who values his or her leisure time at all will choose it over essentially working for the government for a good part of the year.
North Carolina’s ranking with regard to marginal taxes is, if you can believe it, far worse than its ranking in average tax burden. According to a recent compilation of 2001 state tax rates by the Washington-based Tax Foundation, North Carolina’s new top income tax rate of 8.75 percent ranks sixth in the nation. It is surpassed only by the top rates in Montana (11 percent), California (9.3 percent), the District of Columbia (9.3 percent), Oregon (9 percent), and Iowa (8.98 percent).
In fairness, all of these states have lower thresholds to qualify for the top rate, as do several states with rates just below North Carolina’s, such as Hawaii (8.5 percent), Maine (8.5 percent), and New Mexico (8.2 percent). Still, if you were a corporate executive or professional with a high income – or perhaps an entrepreneur who hopes to be earning a high income within a few years – you will pay far more of your income in taxes if you moved to North Carolina than you would in almost every other state.
But please, please move yourself and your business to our state, anyway. Okay?