North Carolina’s Temporary Tax Increases Closer to Permanence

April 12, 2007

In 2001, North Carolina enacted “temporary” tax 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 tax 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 tax.

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 bracket 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.

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