State Budgets: North Carolina Plan to Hike Rates, Keep Narrow Base

July 22, 2009

North Carolina reached a disappointing compromise today. Having earlier walked away from calls for spending cuts and moving away from the shortfall-tax increase cycle, the House and Senate debated between opposing plans about how to raise $990 million in new revenue. The Senate plan would have broadened the sales tax base and lowered its rate by three-quarters of a point, did something similar for income taxes, and cut the corporate income tax from 5.8% to 4.5%. It’s not perfect by any means (plus it included higher cigarette taxes), but if taxes must go up, going the route of broadening bases and lowering rates is preferable to just raising tax rates because it can help the state be in a stronger competitive position when the economy recovers.

The House plan simply hiked the sales tax to 7% and imposed one of those popular surtaxes on high-income earners that send terrible business-unfriendly messages.

It looks like the compromise (influenced by Gov. Bev Perdue (D) incorporates some bad elements from both plans with little of the good. The state will be hiking the sales tax by three-quarters of a point or perhaps a full point to 7.5% or 7.75%, raising $100 million in some fashion from ever higher cigarette and alcohol taxes, trying to tax out-of-state companies like Amazon.com (get ready for years of litigation on that), and a surtax that will require taxpayers to pay 102% of their state taxes. There’s no base broadening for the sales tax, meaning that the state government will continue to distort economic decisions by taxing similar transactions differently.

More on North Carolina here.


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