RALEIGH – Is it April 15 already?
Just seems like yesterday that I was filling out my tax forms for 2003. Now I’ve got to finish up my taxes for 2004 and pay Uncle Sam and Cousin Mike a tidy sum for the privilege of living in America and North Carolina, respectively.
Actually, I ought to be a bit chipper about all this, according to the Washington-based Tax Foundation. Thanks to Congress and the Bush administration, the federal tax burden has gotten lighter over the past four years. The Foundation’s annual Tax Freedom Day release came out Monday showing that for the national-average household, April 17 was the day that the household stopped working to pay its taxes and starting keep its own money. While up slightly over 2004 because of bracket creep, the statistic still reflects the impact of the overall decline in federal taxes during the period (Tax Freedom Day was May 3 in 2000).
The 2005 uptick may also reflect the rise in state and local taxes during the same period, especially here in North Carolina. According to the Tax Foundation report, we are now officially the highest-taxed state in the Southeast, at 10 percent of personal income going to state and local taxes, while previously top-ranked Georgia falls to 2nd with a 9.8 percent average tax burden and South Carolina ranks 3rd with a 9.7 percent rate.
These are not dramatic differences in average tax burdens, admittedly. I think three other factors should hold our interest. First, North Carolina’s ranking on average tax burden is worsening — falling from 37th in the country as recently as 2000 to 28th today — in part because of big state and local tax increases here and in part because a weak economic recovery in the state has depressed personal-income growth (the denominator of the fraction in question).
Second, the longer-term trend is stark. During the 1970s and early 1980s, North Carolina‘s average tax burden hovered around 9 percent of income. Then a series of tax increases – first corporate-income, sales, and gas taxes during the 1980s and then a huge tax-hike package in 1991 – drove our average tax burden up to about 10 percent. Some modest tax relief in the mid-1990s did not pull the burden down much, and it’s been heading up again since 2000.
Finally, and more importantly, a political jurisdiction can have high marginal tax rates and still have average tax burdens closer to average. The marginal rate is what you pay on the next dollar of income. North Carolina’s marginal tax rates on income are among the highest in the U.S., with a top rate of 8.25 percent (for now) and a second-highest rate of 7.75 percent, still high by national standards. Even our combined retail-sales tax rate (averaging just over 7 percent) is higher than most of our neighbors’. If these high marginal rates discourage high-earning professionals and executives from earning income or doing business in the state, the result can be a lower-than-anticipated collection of revenue.
That’s called a “supply-side effect,” in case you’ve been living in a cave — or Raleigh, its public-policy equivalent.
Hood is president of the John Locke Foundation.