RALEIGH – North Carolina is a state of many firsts.
We were first in freedom – except, of course, for the shameful persistence of chattel slavery for nearly a century after independence.
We were the first to create a state university – thus ensuring that North Carolina’s wealthy elite could get a subsidized college education at a time when the rest of the country’s wealthy elite were forced to pay for their own children’s education.
We were first in flight – well, actually, no we weren’t but I’m trying to develop a theme here.
More recently, North Carolina has been distinguished in other ways. Since 2000, our state has been first in the South in job losses. We shed nearly 150,000 private-sector positions from January 2001 until May 2004, or about 4.4 percent of the private workforce. The percentage loss for the region as a whole was 1.4 percent.
And according to the latest count from the U.S. Census Bureau, North Carolina is first in the Southeast in taxes. After the new 2001-02 data came out recently, I combined it with a measurement of personal income in each state to compute an “effective tax rate” – the share of income paid in state and local taxes in each jurisdiction.
For many years, our state has ranked second in the region on this measure of average tax burden, even though North Carolina imposed by far the highest income taxes (indeed, our top personal income tax rate ranks among the highest in the United States). The reason was that our property taxes were relatively low and our sales tax roughly average, thus moderating the effects of our income taxes on the overall burden.
But the situation has been changing. In 2001, Gov. Mike Easley and majorities in the General Assembly reacted to a budget deficit by enacting a large tax increase, much of it in the form of general and selective sales taxes and a new 8.25 percent tax rate on personal income. Simultaneously, economic pressures and the governor’s decision to withhold hundreds of millions of dollars in local tax sharing and reimbursement dollars led some localities to hike their property-tax rates. Thus our property tax burden began creeping up, and our sales tax burden actually surpassed the regional average.
By 2001-02, when the first wave of tax increases began to empty taxpayers’ wallets, North Carolina had slightly edged out Georgia (9.91 percent vs. 9.89 percent) to lead the seven Southeastern states in effective tax burden. More recent estimates from the Tax Foundation don’t show this trend extending into 2003 and 2004, but these are projections and thus lack the comprehensiveness of the Census data (though they have the advantage of timeliness). And it’s worth remembering that North Carolina’s average tax burden, while above regional and historical norms, isn’t even close to being among the highest in the country (though our taxpayers do bear a heavier burden than those in Massachusetts, believe it or not).
Actually, the rankings aren’t critical. I’m more interested in what the regional benchmarks tell us about North Carolina’s fiscal posture. If policymakers had done what was necessary just to keep our tax burden at the regional average, North Carolinians would have paid more than $1.3 billion less in state and local taxes than we did in 2001-02.
But then we couldn’t have been first in something, again.
Hood is president of the John Locke Foundation and publisher of Carolina Journal.