RALEIGH – You pay too little in taxes.
That is apparently the belief of many if not most members of the North Carolina House. It may well be a popular sentiment among members of the North Carolina Senate, as well, though we may not have the opportunity to find out this year.
The politicians’ belief that your taxes are too low persists even after the passage some weeks ago of a 2005-07 state budget that includes, for the fourth time in five years, a package of significant tax increases. A majority of lawmakers chose to re-impose higher sales and income-tax rates first enacted in 2001, raise the sales tax on several items, preserve a costly death tax, and smack smokers with hundreds of millions of dollars in higher taxes each year.
But it just wasn’t enough, you see. There are so, so many unmet needs in government. Having the highest effective tax burden in our neighborhood isn’t enough to make North Carolina a “progressive” state. It must go higher. It might well go higher.
A push by Lee, Pitt, and several other counties began earlier this year to secure permission to impose a higher sales tax to pay for school construction or other local-government needs. The legislation has mutated over the past few weeks, and has now added nearly half the state’s counties to the list. There is a requirement for a voter referendum before the tax can be levied, which is welcome, but unfortunately these referenda will be shaped in part by taxpayer-funded propaganda about how school kids will be without places to sit unless the tax is approved.
Is North Carolina undertaxed? Not by historical standards, or in comparison to our neighbors. Our sales tax has shown a pronounced upward trend since the early 1990s. Once relatively low (5 percent in 1991) the combined state & local tax rate on retail sales is now 7 percent in every jurisdiction except Mecklenburg County, where there is an extra half-cent for transit (enacted in a 1998 referendum during which the voters were woefully misinformed about the full cost and ramifications of the proposed light-rail lines).
That works out to a weighted average of 7.05 percent, which turns out now to be among the top dozen or so sales-tax rates in the United States. Most of the states with higher sales taxes have no income tax. But North Carolina imposes some of the highest income-tax rates in the South.
Enough already. Our problem is not a lack of revenue. It is a lack of fiscal discipline. If the General Assembly wants to help counties afford school construction, the best solution would be to shoulder the entire non-federal share of the Medicaid program, a move that would be the equivalent of giving counties a new revenue stream growing faster than that from any imaginable tax. Then the state should reform Medicaid to reduce the cost it imposes on taxpayers.
North Carolinians are not undertaxed. They are underserved – by politicians.
Hood is president of the John Locke Foundation.
Update: Rep. Dale Folwell of Forysth County called Friday morning to remind me about a point on all this that I didn’t explain — the flow of sales-tax revenue to municipalities, which of course aren’t going to be using the money to build schools. They automatically get a share of the annual take, based either on property-tax collections or population. The breakdowns appear to be as follows, assuming a half-cent sales tax is enacted in each jurisdiction: Mecklenburg County gets $33 million while its cities and towns get $15 million; Wake gets $25 million and its cities $19 million; Guilford gets $15 million and its cities $12 million; and Forsyth gets $13 million while its cities get a little over $6 million.