RALEIGH – Here’s a thought: what if North Carolina’s government was nine percent smaller?
As thought experiments go, this is not exactly a beaker full of explosive chemicals. It’s an eight-grade science fair. It’s modest and restrained. And, yet, it is highly relevant to our fiscal and political debates.
I didn’t pluck nine percent out of the air. I computed it using data from the Tax Foundation’s new national comparisons of tax burdens. In recent years, North Carolina has been creeping up the national rankings in state and local taxes. The latest rankings put our state in the top half nationwide for the first time in memory. North Carolinians will pay an average of 10.45 percent of their income to Raleigh and various local governments. That’s a higher tax burden that in any of our Southeastern neighbors and ranks 23rd in the nation. Among the 11 Southern states as a whole, only Louisiana ranks higher. Expand your definition to include border states, and North Carolina comes in fifth out of 16 (below Louisiana, Maryland, Kentucky, and West Virginia).
I’m offering several regional breakdowns, by the way, because some have criticized the claim that North Carolina has the highest taxes in the Southeast. The debate is really about what is the “Southeast.” But as you can see, it doesn’t matter how expansively you want to define the region, North Carolina’s cost of government is at or near the top.
Besides, most North Carolinians don’t view their peers and economic competitors as consisting of, say, West Virginia or Louisiana. No offense intended to expatriates from those beautiful climes, I’m just making the observation. We tend to think about Sunbelt dynamos such as Florida, Texas, and Virginia as pacesetters for our peer group. On taxes and government, these states have their own problems and fiscal mistakes, it is true, but they do contrast positively with North Carolina. Their average tax burden is nine percent lower than ours.
Before you dismiss the difference as no big deal, a couple of points need emphasis. First, it isn’t only taxes as a percentage of income that matters. It also matters how the taxes are collected. Tax structure affects economic decisionmaking. Texas and Florida have no income tax. Virginia has a flat-rate income tax. North Carolina’s graduated rates, hitting high-income earners at around eight percent (pushing their combined marginal rates above 40 percent), are atypical and counterproductive. They make our tax base a little smaller and that reduces the tax take in reality from what the rates look like they should raise on paper.
Second, nine percent of a big number is a big number. The Tax Foundation data are (properly) state and local government combined. Let’s imagine that North Carolina reduced the two proportionally by nine percent, so as to allow for a nine-percent reduction in the tax burden. In the state portion alone, that would translate into a General Fund budget $1.5 billion smaller than the $17 billion for FY 2005-06. That would have allowed lawmakers to eliminate the “temporary” sales and income taxes perpetuated since 2001, plus add another $1 billion or so in tax relief – lower income tax rates, for example, or a penny off the sales tax.
Are Florida, Texas, and Virginia primitive societies where basic government services are unavailable? Of course not. Indeed, their governments and taxes are excessive, too. But less so than North Carolina’s. It is hardly radical to calibrate our fiscal sights according to their experience – at least for starters.
Hood is president of the John Locke Foundation.