July 24, 2009

North Carolina Budget “Compromise” Between House and Senate Combines the Worst of Both

Budget Deal Includes Sales and Excise Tax Hikes, Personal Income Surtax

Washington, DC, July 24, 2009 – North Carolina legislators announced a budget deal this week, a compromise that will hurt the state’s economy far more than was necessary to balance the budget.

Combining tax provisions from House and Senate versions, the deal reportedly includes a state sales tax increase of a full point from 4.5% to 5.5%, which on top of North Carolina’s high local rates will extract between 7.75% and 8.25% from North Carolina shoppers on taxable goods.

Other tax hikes in the package include a surtax on personal income, a cigarette tax hike of 10 cents per pack, “Amazon taxes” on out-of-state retailers, plus as yet undetermined tax hikes on beer, wine, and liquor.

“What was compromised here is North Carolina’s economy,” said Joseph Henchman, Tax Counsel and Director of State Projects for the Tax Foundation. “Lawmakers abandoned spending cuts or tax reforms that could end the vicious cycle of budget shortfall followed by tax hikes followed by budget shortfall.

“Instead, legislators have focused on how to raise $990 million in new revenue by raising statutory tax rates,” Henchman continued. “State legislators could have raised tax revenue by broadening bases and lowering rates, putting the state in a stronger competitive position when the economy recovers.”

The Senate plan would have broadened the sales tax base and lowered its rate by three-quarters of a point, reformed the personal income tax rate structure, cut the corporate income tax from 5.8% to 4.5%, and increased cigarette taxes. The House plan hiked the sales tax rate and imposed a “millionaires’ tax” on high-income earners.

“The so-called compromise incorporates bad elements from both plans with little of the good,” Henchman said. “There’s no broadening of the sales tax base, meaning that the state government will continue to distort economic decisions by taxing similar transactions differently. A more neutral plan would prevent government—or special interests—from micromanaging the economy. The cross-border traffic of North Carolina residents shopping in neighboring states is likely to increase as its neighbors gain an even bigger tax advantage.”

The Tax Foundation is a nonpartisan, nonprofit organization that has monitored fiscal policy at the federal, state and local levels since 1937.


More information on North Carolina may be found online at http://www.taxfoundation.org/state-tax-climate/articles/north-carolina. To schedule an interview, please contact Tax Foundation Manager of Media Relations Natasha Altamirano at (202) 464-5102 or naltamirano@taxfoundation.org.