Eliminating the NC income tax would shift burden to the poor

January 17, 2013 at 8:26 am

Yesterday, some legislators presented a proposal to overhaul the state’s tax code, which included eliminating the personal and corporate income taxes  while increasing and expanding the sales tax. Legislators claim that this is necessary to modernize the state’s tax code and revive the economy. However, what such a proposal does is actually shift the tax burden onto lower-income people while easing the burden on the wealthiest.

The sales tax is a regressive tax, meaning that it has a greater impact on lower-income individuals and families as compared to higher income individuals and families. The reason for this is simple– lower-income people spend more, as a percentage of their income, buying necessities and therefore end up paying more in sales taxes. Higher income people spend a smaller percentage of their income on purchasing day to day items, and therefore spend less– again, as a percentage of their total income– on the sales tax. The income tax, however, is more progressive, meaning that the relative burden is lower on lower-income people. This is because certain provisions exist to reduce the burden on lower-income people. Things like tax credits, such as the Earned Income Tax Credit, or multiple tax brackets rather than a flat tax, make the income tax more progressive.

When all state and local taxes are taken together, the overall tax system in North Carolina is regressive. As the Budget & Tax Center has shown in many analyses, everyone in the state pays taxes and the burden overall falls more heavily on those with the least ability to pay.

Removing the income tax and relying on the sales tax would make the tax system even more regressive.  The bottom 80 percent of income earners– the majority of people in the state– would see tax increases, while the top 20 percent would see tax cuts. The chart below shows the change in tax burden if we shift to relying mainly on the sales tax.

This proposal would not help to spur economic growth, let alone alleviate the growing divide that we have seen between the poor and the wealthy. Our tax system does need to be revamped so that we can raise the resources we need to invest in the things we care about– education, infrastructure, parks and open spaces, caring for our elderly, health care, safety, etc. However, the elimination of income tax and shift to the sales tax is not the way to go. Instead, our lawmakers should take a look at how we can modernize our tax code while maintaining equity and fairness across the board.

Entry filed under: Economic Development, Economy. Tags: , , .

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