Point of View

Beware the great tax swap in North Carolina

December 26, 2012 

If a tax plan released by the Civitas Institute, designed by national economist-for-hire Arthur Laffer and likely to be the blueprint for the General Assembly leadership goes forward, the majority of North Carolinians will see their state taxes go up – while the very richest will see theirs go down.

If that doesn’t seem like a good idea, that’s because it isn’t. Such a tax swap – eliminating the state’s personal and corporate income taxes and greatly increasing the sales tax – won’t solve the problem with our current tax system and will do more to shift the load to the middle class.

Serious research overwhelmingly concludes that income tax rates have no effect on a state’s overall economic well being. And in fact a recently re-released study by the Congressional Research Service confirms, after a review of the 65-year reduction in the top income tax rates at the federal level, that there has been little to no associated effect on savings, investments and productivity growth.

The reality is that states that have made consistent investments in educating their children, protecting their communities and building their infrastructure are far better positioned to compete and grow. It is through the investments that taxes make possible that we are also able to keep poverty in check and increase access to opportunity so that the average North Carolinian can see improvements in their financial standing.

It is not only misguided to do away with North Carolina’s income tax on economic grounds, it’s also bad for the state in a number of other ways.

For one thing, it would make it harder for North Carolina to meet its growing needs and to avoid even worse service cuts than we’ve experienced in recent years. The proposal would shift North Carolina away from a diverse revenue system, including the income tax, to a system solely reliant on consumption taxes.

Unlike other taxes, the income tax is based on one’s ability to pay. And income tax revenue tends to grow as the economy grows, which means the state can make crucial investments in education and other building blocks of a strong economy. And it can put money aside for the next economic downturn.

In contrast, relying only on consumption taxes would make our revenue system less stable. When the next downturn hits and consumer spending plummets, North Carolina’s revenue would plummet along with it with no other tax to counter-balance its decline. That would trigger even harsher cuts to education, health care and public safety than we’ve seen in the last few years.

Second, because low- and middle-income people tend not to make enough to meet their basic needs, they spend almost all of their earnings. Increasing sales taxes would raise their taxes overall.

The richest 1 percent on the other hand – those making on average over $1 million a year – would see a tax cut if income taxes were eliminated. There would be no assurance the money they save on taxes would get back into the North Carolina economy.

In the end, the goal for a modern revenue system must be to bring in the resources needed to make the investments that create jobs and build the economy – and to do so fairly.

We all benefit when our schools excel at educating our children, when roads connect businesses to consumers and public transportation connects workers to jobs. Our economy is strengthened when North Carolinians struggling in difficult economic times still can access preventive health care and get retrained for their next job.

These are investments that help families climb into the middle class. Yes, everyone pays taxes, and everyone benefits from the investments that taxes make possible.

We can see the benefits all around us: North Carolina’s historic investments in a world-class university system and highly ranked business climate, to name just two. Taxes have enabled our state’s long-term growth.

Eliminating North Carolina’s personal and corporate income taxes is not a modernizing strategy. It’s a move backward. It would take our state back to pre-Depression-era policies when income inequality grew unchecked and, even more than today, too many families in too many communities had no pathway to opportunity.

We need the debate over modernizing our tax system to stick to facts and be sharply focused on what it really takes to build a better North Carolina. Big alarms should go off when we hear about proposals that ignore what has made our state great.

Alexandra Forter Sirota is project director for the N.C. Justice Center.

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