Point of View

How the state income tax lifted North Carolina

March 2, 2013 

State legislative leaders have declared an intention to seek a total repeal of the state’s taxes on personal and corporate income.

A cautionary word about why and how North Carolina came to have its current income tax system and its benefits is in order before so radical a step is taken.

First, a bit of history.

Before 1921, the chief source of the state government’s income was our tax on the value of property, real and personal. The tax rate was set by the General Assembly. The state had no revenue department, so the listing of property for taxation, the determination of its value (assessment) and the collection and remittance to Raleigh of the state tax dues were done by county tax authorities. Those officials had little incentive to be helpful to the state at the expense of their neighbors, so the state’s tax system was in a shambles and inadequate to meet its revenue needs.

Property taxes had only an indirect relation to a taxpayer’s ability to pay taxes.

The General Assembly of 1919 ordered a new statewide listing and revaluation of all property, real and personal. The result: The value of listed property tripled from $1 billion to $3 billion. That increase was due to the discovery of much previously unlisted real and personal property and the assessment of all property at more realistic values. Those findings conditioned the public to consider a fairer and more efficient mode of taxation.

Gov. Thomas Bickett recommended to the General Assembly instituting a modern income tax, one that was keyed to the ability of the taxpayer to pay.

In response, the General Assembly and voters of the state amended the constitution in 1920 to authorize the legislature to levy modern income taxes on persons and corporations. That legislative action was taken in 1921.

At the same time, the legislature relinquished the taxation of property to the counties and towns, a long-sought policy. That action was seen nationally as modernizing our state tax system.

The result was a large and growing increase in the state’s annual income. That enabled the state to take several badly needed actions that catapulted North Carolina ahead in the extent and quality of state services to its people.

For example, state colleges and charitable institutions gained substantial capital improvements and larger operating budgets. The public school term was extended from six to eight months in 1933. Other state services were improved.

At the same time, the state assumed full responsibility for building and maintaining the state’s primary highway system, paying the costs from newly levied taxes on motor fuels and other vehicle-related expenditures (and 10 years later assuming from the counties the full responsibility for building and maintaining the secondary road system). Those actions were extraordinary in their time, and some states have not yet matched them.

In 1933, the General Assembly reluctantly levied the state’s first general retail sales tax of 3 percent in response to lowered incomes during the Great Depression.

Those actions in the first third of the 20th century were not the work of officials who were perceived as radical, then or now. They were responsible, conservative citizens who sensed the needs of the people for more and better services and recognized the justice of putting the taxable resources of the whole state to the services of the needs of the whole state. In retrospect, their actions should be recognized as examples of enlightened leadership.

Today, the personal income tax yields about 50 percent of the state’s own revenue, the corporate income tax another 5 percent. The general sales tax raises about 31 percent of the state’s own revenue.

To broaden the coverage of the state sales tax, by whatever name, would require a sharp increase in the sales tax rate and its extension to goods and services now exempt to an extent that no other state has managed. The effect would be to transfer a much larger share of paying taxes to lower and middle income earners and offer corresponding relief of higher income earners.

John L. Sanders of Chapel Hill directed the Institute of Government at UNC-Chapel Hill for 25 years. He played a pivotal part in developing the statewide community college system, integrating the University of North Carolina and in preserving the State Capitol.

News & Observer is pleased to provide this opportunity to share information, experiences and observations about what's in the news. Some of the comments may be reprinted elsewhere in the site or in the newspaper. We encourage lively, open debate on the issues of the day, and ask that you refrain from profanity, hate speech, personal comments and remarks that are off point. Thank you for taking the time to offer your thoughts.

Commenting FAQs | Terms of Service