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North Carolina’s Temporary Tax Increases Closer to Permanence

2 min readBy: Curtis S. Dubay

In 2001, North Carolina enacted “temporarytaxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. hikes in sales and income tax rates. Six years after enactment and four years after the first deadline for expiration, North Carolinians are still paying these taxes.

To address a “budget crisis” that is long gone, the 2001 law raised the sales taxA sales tax is levied on retail sales of goods and services and, ideally, should apply to all final consumption with few exemptions. Many governments exempt goods like groceries; base broadening, such as including groceries, could keep rates lower. A sales tax should exempt business-to-business transactions which, when taxed, cause tax pyramiding. from 4.0 to 4.5 percent and the top income tax rate from 7.75 to 8.25 percent. These tax hikes were supposed to expire in 2003.

Eventually, in 2006, politicians grudgingly permitted a half-way measure as the sales tax fell to 4.25 percent and the top income tax rate to 8.0 percent. The new deadlines for complete expiration that taxpayers can ruefully anticipate are July 1, 2007, for the sales tax and January 1, 2008, for the individual income taxAn individual income tax (or personal income tax) is levied on the wages, salaries, investments, or other forms of income an individual or household earns. The U.S. imposes a progressive income tax where rates increase with income. The Federal Income Tax was established in 1913 with the ratification of the 16th Amendment. Though barely 100 years old, individual income taxes are the largest source of tax revenue in the U.S. .

Unsurprisingly, Governor Easley and the Speaker of the House have other ideas, from today’s edition of State Tax Notes (subscription required):

North Carolina Gov. Mike Easley (D) is no longer the lone voice in favor of extending two temporary taxes enacted during the budget crisis of 2001. Following a recent news conference on high school drop-out rates, House Speaker Joe Hackney (D) said the Democratic majority in his chamber would likely support keeping the extra 0.25 percent sales tax and the 8 percent income tax bracketA tax bracket is the range of incomes taxed at given rates, which typically differ depending on filing status. In a progressive individual or corporate income tax system, rates rise as income increases. There are seven federal individual income tax brackets; the federal corporate income tax system is flat. in place — at least for now.

Our recently released report on state-local tax burdens showed that North Carolina’s tax burden rank has seen the largest increase of any state since 2000 – 17 ranks. It had the 36th highest state-local tax burden in 2000 (10.0 percent of income), but now it ranks 19th highest (11.0 percent of income). This large increase is probably the result of the temporary tax increases.

If the governor and the speaker have their way, North Carolina’s tax burden will not fall back to previous levels.

The temporary tax increases also hurt North Carolina’s business tax climate-ranked 40th in our 2007 State Business Tax Climate Index. A permanent repeal of the temporary taxes would help improve North Carolina’s low rank.