Why who pays taxes matters

By: - October 10, 2012 6:00 am

If a plan proposed by a majority in the General Assembly goes forward, eight out of 10 North Carolinians will see their state taxes go up – and 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 – has been suggested by legislators who claim it will solve a problem that actually doesn’t exist.

By now, most people probably have heard the discredited contention that almost half of Americans pay no taxes.

While it’s true that 47 percent pay no federal income taxes—retired seniors, people with disabilities who can’t work, students who will pay federal income taxes after they graduate, or workers who don’t make enough money—this group pays plenty of other taxes: federal payroll taxes, state and local sales tax, property tax, gas tax, you name it.

It is not only misguided to do away with North Carolina’s income tax on the grounds that too many people pay too little tax, it’s also bad for the state in a number of 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 right along with it with no other tax to counter-balance its decline– meaning 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 one percent on the other hand – those making on average over $1 million a year – would see a tax cut if income taxes were eliminated.

If those two reasons aren’t enough to oppose the tax swap here’s one more: The supposed reason for getting rid of the income tax (that it would help the state’s economy) is false. Serious research overwhelmingly confirms that income tax rates have no impact on a state’s overall economic wellbeing. And in fact, a recent study by the Congressional Research Service, found that 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.

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 can still access preventive health care and get retrained for their next job. These are investments that help families climb into and stay in 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.

So big alarms should go off when we hear about proposals that ignore what has made our state great.

Eliminating North Carolina’s personal and corporate income taxes is not a modernizing strategy. It’s a move backwards. 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

Alexandra Forter Sirota is the Director of the North Carolina Budget and Tax Center.

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