RALEIGH – The tax burden in North Carolina is going down. But North Carolina’s tax burden is going up.
Let me explain. According to By the Numbers 2005, a report by policy analyst Michael Lowrey for JLF’s Center for Local Innovation, the cost of federal, state, and local taxes, fees, and other charges averaged about 29 percent of North Carolinians’ personal income in 2003, down from 33 percent of income in 2001. That’s a significant and welcome drop.
Unfortunately, it occurred entirely because of actions in Washington. Congress and the Bush administration enacted a series of tax cuts that, while not all well-structured, together provided significant relief to taxpayers and freed up resources to propel economic recovery.
While the federal tax bite was going down, however, the state and local tax bite was going up. In Raleigh, state lawmakers and Gov. Mike Easley approved a series of tax increases costing taxpayers about $1 billion annually. At the local level – the focus of By the Numbers 2005 – many counties and municipalities raised their property taxes and adopted a higher sales tax rate offered to compensate them for local tax revenues skimmed off for use in balancing the state budget.
In 2003, local government took about 4.7 percent of personal income in North Carolina, up from 4.3 percent in 2001. The longer-term trend is more dramatic – about a full percentage point up since 1993-94. That might not sound like much, but in actuality it represents hundreds of dollars a year per North Carolinian after adjusting for inflation.
Defenders of local governments offer several justifications, which they label “explanations,” for the trend. First, they blame state government for pilfering their money and imposing unfunded mandates. OK, I’ll buy that to some extent. Next, they say that North Carolina is a growing state, which generates demand for more services, which necessitates higher taxes than the growing economy can generate at a given tax rate. This might seem plausible, at least in extreme cases where growth comes in great big chunks but higher tax collections take a while to materialize, except for the fact that some of the same analysts blame a lack of growth for tax increases in other areas, either to offset a declining tax base or to generate public funds for “economic development.”
Finally, some say that these trends really make the case for giving cities and counties alternatives to their traditional sources of revenue in property and sales taxation. To which I respond, huh? More taxing authority means more taxation. That’s already the problem. It is a mirage to suggest that most local taxes can be shifted to “others,” whoever they may be. All taxes are income taxes, in the sense that all are paid with income earned. Except for a few resort communities, local tax collections are going to come from local residents one way or the other – and even in the exceptional cases, localities with significant tax revenue from tourism or second homes rarely use it to cut property taxes. They just spend it on more government.
It’s time for state and local politicians in North Carolina to do their share in making government less costly and more focused on a limited but important set of core public services.
Hood is president of the John Locke Foundation and publisher of Carolina Journal.