RALEIGH — Once again, it’s a year of tough budget choices in North Carolina, both at the state capital in Raleigh and in dozens of cities and counties across the state. One of the arguments we’ll likely hear from state officials, interest groups, and commentators is that the “compassionate choice” in addressing budget gaps is to raise taxes rather than tighten up on spending for government programs.
Thursday evening, for example, social-service and arts group in Charlotte will make their case to county commissioners seeking to balance their budget (they’re talking about hiking taxes and cutting back in some spending categories). Something similar will play out at the state legislature next week, as the House version of a 2004-05 budget plan makes it to the floor with, in all likelihood, a lower rate of growth in spending for some state programs than Gov. Mike Easley had requested.
In our first-ever “Raising the Issue” debate over at The Locker Room, Rob Schofield of the North Carolina Justice Center debated me on the specific issue of whether North Carolina should seek budget savings in the state’s health and human services programs. More generally, however, I’ve got to lodge my complaint that focusing primarily on those who stand to lose some access to other people’s money is the wrong way to frame the fiscal debate.
Why isn’t it compassionate to concern ourselves with North Carolina’s tax burden? Consider both the direct and indirect costs to households. Federal, state, and local taxes and fees add up to consume about 30 percent of personal income in North Carolina, on average. This percentage has actually trended down for a few years because of federal tax cuts, but the state and local share has gone up. Compared to their counterparts in neighboring states also benefiting from lower federal taxes, North Carolina families enjoy less freedom to spend their own money as they wish to buy the goods and services they need and desire.
Nor is this problem confined to upper-income households. The largest component of recent state tax-hike packages have been two separate half-penny increases in the retail sales tax, taking North Carolina’s combined rate to over over 7 percent (Mecklenburg pulls the statewide average up a bit because it imposes a 7.5 percent rate). That’s higher than most of our neighbors’ sales-tax rates, and Tennessee’s is significantly higher because it has no income tax at all. Sales tax are somewhat regressive – they impose a higher average tax burden on lower-income people – because some personal services disproportionately consumed by upper-income people are exempt. In the Locke Foundation’s 2003 Freedom Budget, my co-authors and I called for repealing this burdensome and unfair sales-tax increase.
Another direct way to be “compassionate” is to alleviate the burden on families with children by reducing the impact of federal and state taxes on their ability to spend their own money for their children’s education, training, and medical care. I view much of these expenditures as investment in “human capital” and thus deserving of the same tax exclusions that dollars invested in IRAs receive. In both cases, the investment will pay off in the future in taxable income, so the principal — what is invested today — should be excluded from the base to avoid double-taxation. In the Freedom Budget, we proposed converting some existing social programs into a package of tax credits to accomplish this important tax reform.
Indirectly, having higher marginal tax rates than our competing states, particularly on investment returns and personal income, serves as a drag on growth and job creation in North Carolina. Much of what state government “invests” tax dollars in bears little economic fruit, according to the studies I’ve seen, while the tax burden has at least a moderate relationship to state economic growth.
It may be a cliche, but it also happens to be true: The best anti-poverty program is a job.
Hood is president of the John Locke Foundation and publisher of Carolina Journal.