According to a study from the The Institute on Taxation and Economic Policy and the Budget & Tax Center, North Carolinians with the lowest income pay more than 40 percent more in taxes (as a percent of their income) compared to the state’s wealthiest residents.
The ITEP even calls the state and local tax system “unfair,” ranking North Carolina as number 31 on the list of states with the “most unfair tax systems” in the country. The study bases this, in part, on the number of regressive tax structures in place.
“The study, Who Pays?, analyzes tax systems in all 50 states and factors in all major state and local taxes, including personal and corporate income taxes, property taxes, sales and other excise taxes,” reads a press release from the North Carolina Justice Center. “The lowest 20 percent of North Carolinians – earning less than $18,000 – pay 9.2 percent of their income in taxes” whereas the top 1 percent of earners (who earn more than $376,000) pay 5.3 percent of their income in taxes.
“The upside down nature of the state’s tax code puts a heavier load on middle- and low-income taxpayers at a time when their incomes are stagnant and falling,” says Cedric Johnson, public policy analyst with the Budget & Tax Center. “North Carolina has put in place policies to address this issue in the past and should once again consider policies like a state Earned Income Tax Credit, a renter’s credit or an enhanced and refundable Child Tax Credit to improve the state’s tax code.”
Here are some finds for North Carolina in the study:
North Carolina Tax Code Features
• Provides a targeted nonrefundable child tax credit
• State sales tax base excludes groceries
• Personal income tax uses a flat rate
• Comparatively high state and local sales tax rates
• Local sales tax bases include groceries
• Fails to provide refundable Earned Income Tax Credit (EITC) since credit was eliminated in 2013
• Fails to provide a property tax “circuit breaker” credit for low-income taxpayers
• Child Tax Credit is nonrefundable
Tax Changes Enacted in 2013 & 2014
• Converted graduated personal income tax to a flat 5.75 percent rate
• Eliminated all credits other than the child tax credit which was increased by $25 for those with incomes under $40,000
• Eliminated personal exemptions and increased standard deduction
• Eliminated all itemized deductions other than mortgage interest and property taxes (subject to a $20,000 cap), and charitable contributions (no cap)
• Eliminated $50,000 business pass-through exclusion from personal income tax
• Cut the corporate income tax rate
• Expanded the sales tax base to a few goods and services; electricity now subject to full state and local sales tax rate
More from the NC Justice Center:
How North Carolina taxes residents matters for myriad reasons. In recent years, anti-tax advocates have pushed for tax policies across the country that would reduce tax rates for the wealthy and profitable businesses. The tax plan passed by North Carolina state lawmakers in 2013 replaced a graduated personal income tax rate structure (meaning the higher one’s income, the higher one’s effective personal income tax rate) with a flat rate of 5.75, allowed the state’s Earned Income Tax Credit to expire, eliminated personal exemptions and most itemized deductions, expanded the sales tax base, and allows the corporate income tax rate to be cut from 6.9 to as low as 3 percent.
The problems with this agenda are clear. Foremost, many anti-tax proposals would make regressive tax structures even worse, in part because they often rely on hiking taxes that fall more heavily on poor and middle-income families to pay for tax cuts at the top. Second, aggressive tax cuts that favor businesses and the wealthy can result in states having difficulty adequately funding basic public obligations such as education.
There’s also a more practical reason for North Carolina and all states to be concerned about regressive tax structures, according to ITEP. If the nation fails to address its growing income inequality problem, states will have difficulty raising the revenue they need over time. The more income that goes to the wealthy (and the lower a state’s tax rate on the wealthy), the slower a state’s revenue grows over time.
“In recent years, multiple studies have revealed the growing chasm between the wealthy and everyone else,” said Matt Gardner, executive director of ITEP. “Upside down state tax systems didn’t cause the growing income divide, but they certainly exacerbate the problem. State policymakers shouldn’t wring their hands or ignore the problem. They should thoroughly explore and enact tax reform policies that will make their tax systems fairer.”
And, according to ITEP, its not just North Carolina. “Middle- and low-income people in all 50 states pay substantially more of their income in state and local taxes than wealthy
individuals and families,” reads a passage in ITEP’s press release. “The disparity is most stark between the lowest-income households and the top 1 percent of households. On average, the poorest 20 percent of taxpayers nationwide pay more than double the effective tax rate paid by the richest 1 percent of households (10.9 percent v. 5.4 percent). ITEP’s analysis factors in all major state and local taxes, including personal and corporate income taxes, property taxes, sales and other excise taxes.”
To read the full report, learn more about the study and/or check out the interactive tax map, click here.