When is a sales-tax increase not really a sales-tax increase?
If you want to make sense of the contrasting claims about tax reform in North Carolina, this is one of the many questions you have to answer. Democrats and the Left, lobbying furiously against the House tax reform bill last week, claimed the House bill would raise taxes on 95 percent of North Carolinians.
Republicans and conservatives responded by pointing to a Fiscal Research Division analysis showing that nearly all North Carolina households would receive a net tax cut of some amount from the House bill, even after accounting for an expansion of the sales tax base to some currently untaxed services.
Usually, statistical disputes in public policy occur within a fairly narrow range. One side predicts that a given proposal would generate an outcome, say a 25 percent increase in societal benefit. The other side says it would be only a 10 percent increase in benefit, or no increase at all. But rarely do you see the kind of radically conflicting claims that we saw in the tax reform debate last week.
The claim that 95 percent of North Carolinians would have their taxes raised under the House plan originated with the N.C. Budget and Tax Center, an arm of the N.C. Justice Center. For years, it has relied on a Washington-based group — the Institute for Taxation and Economic Policy — for economic modeling. Initially, the Budget and Tax Center/ITEP model suggested that some 80 percent of North Carolina households would experience a net tax increase. The model was apparently updated last week to yield the higher claim of 95 percent.
Both claims were preposterous. They assumed, for example, that even upper-income taxpayers in North Carolina — those making between $100,000 and $150,000, for example — will get a tax hike. Will these households really pay enough new sales taxes to offset the hundreds of dollars they’ll save in income taxes? Only in extreme cases, such as a car nut spending big bucks every year getting his luxury vehicle serviced. But the authors are sticking to their statistics, which are being widely disseminated on the Left despite being labeled incorrect by the folks at Fiscal Research who provide official scoring of tax bills for the legislature.
The reasons for the wildly divergent estimates remain unclear. Perhaps one of them involves the question of how much House Bill 998 truly increases the sales-tax burden on North Carolinians.
The first full year of implementation of the sales-tax changes would be FY 2014-15. In that year, according to the official fiscal note, the House tax bill appears to increase sales-tax collections by $828 million — $533 million in state revenue and $295 million in local revenue. This $828 million in total sales tax revenue is much larger than the $588 million in FY 2014-15 income-tax relief in the bill, which could certainly lead a casual observer to conclude that for most households, the sales tax hike in HB 998 might well more than offset any savings they receive from lower income taxes.
But that casual observer would be wrong. Of the apparent $828 million in higher sales tax revenue, $519 million results from applying full sales tax to the sale of electricity and natural gas. Most of that amount, $396 million, simply replaces taxes that North Carolina consumers already pay on their electricity and natural gas. The money is currently collected as gross-receipts franchise taxes for localities and the state. Under HB 998, those franchise taxes disappear, replaced dollar-for-dollar by sales taxes. In other words, only $123 million of the $519 million should be modeled as a real increase in taxes on energy purchases.
This makes a huge difference in the analysis. It means that 52 percent of the apparent increase in sales tax is not an increase at all. It also means that the bill’s income-tax relief is significantly larger than the real sales-tax hike — and since the income-tax relief includes bigger per-child tax credits and standard deductions, even low-income households benefit from it.
Fiscal Research staffers got this right. Did their critics? If so, then the discrepancy between the two estimates remains to be explained. If not, then we have at least a partial explanation.
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Hood is president of the John Locke Foundation and author of Our Best Foot Forward: An Investment Strategy for North Carolina’s Economic Recovery, published by JLF in 2012.