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North Carolina Tax Reform Options: A Guide to Fair, Simple, Pro-Growth Reform
EXISTING TAX SYSTEM
In 1921 and 1933, North Carolina implemented comprehensive tax reform, with the goal of financing a state takeover of local government responsibilities, for the purpose of providing a uniform level of government services across the state. As noted by the 2002 tax reform commission, “One consequence of that policy decision is that North Carolina relies more heavily than does almost any other state on state taxpayers to finance roads, schools, corrections, and courts.”
North Carolinians consequently face a higher income tax burden and a lower property tax burden than other Americans. Taking state and local tax burdens together, North Carolina is medium-high nationally and high regionally.
North Carolina has many areas of its tax code that fail to comport with the principles of sound tax policy. From our meetings with business leaders and policymakers in the state, and from our research on the economic efficiency of various tax structures, we have isolated several components of North Carolina’s code that, with reform, would generate more equitable treatment of taxpayers, attract new businesses, and increase economic growth.
HEAVY RELIANCE ON INCOME TAX, FEDERAL AID
For Fiscal Year 2012-13, North Carolina’s state government will spend just over $51.4 billion. 35 percent ($18.0 billion) of that amount will come from federal aid; 21 percent ($10.5 billion) from tuition, hospital fees, and other fees; and the remaining 44 percent ($22.9 billion) will come from taxes and other general revenues (see Table 14). As a percentage of the total budget, individual income taxes make up 20 percent ($10.2 billion), sales taxes make up 11 percent ($5.5 billion), and the corporate income tax makes up 2 percent ($1.06 billion).
Table 14: North Carolina State Government Sources of Revenue, 1989-present
Billions of dollars
Source: North Carolina Office of State Budget & Management, Statistical Abstract of North Carolina Taxes.
In Fiscal Year 2010 (the latest year for which full data is available), state and local governments in North Carolina together spent $79.9 billion (48 percent by the state government and 52 percent by local governments). Of this combined amount (see Figure 15), $32.7 billion was raised by taxes: $9.1 billion from the income tax, $8.6 billion from property taxes, $8.0 billion from sales taxes, $3.8 billion from excise taxes, and $1.3 billion from the corporate income tax, $0.7 billion from the franchise tax, and $1.2 billion from other taxes.
Figure 15: North Carolina State & Local Government Sources of Revenue, 2010
As a Percent of Total Revenue
Source: U.S. Census Bureau, 2010 Annual Surveys of State and Local Government Finance.
Looking at it another way (excluding local governments, fees, and non-tax revenues), every $1 in taxes collected by the North Carolina state government is made up of 42¢ in state individual income tax, 27¢ in sales taxes, 20¢ in excise taxes (including 7¢ in gasoline tax and 3¢ in car tax), 6¢ in corporate tax, and 5¢ in other taxes. North Carolina relies more on individual income taxes and less on property taxes than the average state, and is about average on sales taxes.
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