RALEIGH – For years, the conventional wisdom about North Carolina taxes went something like this.
For decades, North Carolina has had a relatively high marginal tax rate on individual income. Our corporate tax rate has also remained high by national standards. While these taxes are very visible, prompting complaints from professionals and retirees and dire warnings from corporate executives, the conventional wisdom continues, the state’s property and sales taxes are low by national standards. The result is at least a wash, it was said, if not a “low-tax” ranking for the state.
This conventional wisdom is out of date.
North Carolina still has a high and economic destructive income-tax burden. But now, after years of state and local tax hikes, we levy one of the highest tax rates on retail sales in the nation. Our property taxes have been creeping up, as well.
The latest Tax Foundation computation of sales tax rates puts North Carolina’s average at just over 8 percent, the 8th highest tax rate in the nation. The average reflects the fact that the state currently imposes a 5.75 percent rate, 91 counties impose an additional 2 percent rate, eight counties (Alexander, Catawba, Cumberland, Haywood, Martin, Pitt, Sampson, and Surry) impose a 2.25 percent rate, and Mecklenburg imposes a 2.5 percent rate.
Regarding property taxes, many North Carolinians may not believe this, but our rates remain fairly low by national standards. If you look at property-tax collections per person, for example, North Carolina ranks 38th. But we used to rank even lower than that, as you can see in this Property Tax Index going back in time. (As a matter of relative tax burden, by the way, it’s not at all wise for North Carolina to rely on a high sales tax and a low property tax, because it is far easier to write off the latter on a household’s federal income taxes.)
Overall, then, North Carolina is not a low-tax state. We haven’t been a low-tax state in a long time. Last year, North Carolinians paid 9.8 percent of personal income in state and local taxes, putting us slightly above the national average and 20th in tax burdens in the country. Are we New Jersey, the top-taxing state with an average burden of nearly 12 percent of income? No, not yet. But we’re not Texas (43rd) or Florida (47th) either.
What state and local governments tax, they spend. It’s a good question to ask where North Carolina spends its higher-than-average tax burden. Recent Tax Foundation reports address that issue, too.
It’s not K-12 education, transportation, public safety, or debt service. According to data from the 2007 fiscal year, North Carolina spends less of its budget on those categories than the average state does. Where we rank relatively high in government spending is in higher education (14 percent vs. the national average of 9 percent) and health care (13 percent vs. the national average of 8 percent).
Since neither our college-graduation rate nor our health statistics are particularly impressive, it’s hard to see hard data showing that North Carolina benefits from its excessive taxing and spending. Perhaps we should trim a bit more, particularly in the areas of university subsidies and Medicaid. It’s been suggested before.
Hood is president of the John Locke Foundation