03/05/2024
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By Mike Walden

A couple of days ago my wife heard an enthusiastic “Yippee!” from my home office. “What was that for?” she asked. “Did your Cincinnati Reds finally win a game?” My wife – who was born in New York – sometimes takes joy in reminding me how bad my hometown professional baseball team has performed in recent years.

“Just for your information,” I quickly responded, “the Reds did win last night.” But that wasn’t why I shouted. Instead, I was excited because the latest Facts and Figures from the Tax Foundation was just released. I think I heard my wife respond with, “Knock yourself out.”

I realize that for non-economists, reading about taxes is not their best form of enjoyment. But if you want to look at the taxes of states, and especially to compare both the level and types of taxes among states, then Facts and Figures is an indispensable resource.

Of course, my focus here will be on North Carolina’s taxes. Since it takes time to compile and publish government data, most of the information cited in the 2023 edition of Facts and Figures is from 2020, 2021 or 2022.

Let’s begin by looking at the big picture. The relative size of taxes in any state is captured by two measures: total taxes per capita (total taxes divided by population), and total taxes as a percentage of total income earned in the state. Total taxes include taxes paid to the state government as well as taxes paid to all local governments in that state. Federal taxes are omitted.

North Carolina ranks 32nd among all states for total state and local taxes per capita, and it ranks 31st for the percentage of total income taken by state and local taxes. Hence, North Carolina ranks near the lower one-third of states on the relative size of taxes.

It’s also important to compare North Carolina taxes to other states in the immediate region. Based on per capita and per income measures, North Carolina has higher taxes than the neighboring states of South Carolina, Tennessee, Georgia and Florida. In the immediate region, only Virginia has higher per capita and per income tax rates.

In addition to looking at the total tax picture, it’s informative to examine the specific kinds of taxes states use. Facts and Figures follows five categories of taxes: individual income tax, corporate income tax, general sales tax, property tax and other taxes.

Compared to the averages for the other states, North Carolina collects relatively more of its total state and local taxes from the general sales tax and the individual income tax, and relatively less from the property, corporate income and other taxes. In particular, North Carolina’s collection of corporate income taxes is only half of the average state collection on a percentage basis.

This distribution of tax uses has created a long-standing debate in North Carolina over whether individual and household taxes from the individual income tax and sales tax are too high compared to the much lower corporate income tax. Critics say the current distribution favors corporations too much. Supporters say the state’s low corporate income tax – especially compared to other states in the Southeast – is a major factor behind North Carolina’s excellent record in attracting businesses and jobs to the state.

One tax I haven’t mentioned yet, but which is a tax most of us pay once or several times per week, is the state gasoline tax. North Carolina has a relatively high gas tax rate per gallon compared to other states. The state’s gas tax is 16th- highest among the 50 states. However, in the Southeast, Florida and Georgia’s gas tax rate is higher than North Carolina’s.

There is an easy explanation for the high level of North Carolina’s gas tax. It has to do with how roads are financed in a state. In North Carolina, most road projects are financed at the state level, where the gas tax is the primary source of funding. Relatively few road projects are paid by county and city governments.

However, in many states the financial responsibility for paying for roads is more evenly split between state and local governments. For the local share, property taxes are the major funding source. In these types of states, the reduced road funding from the state level allows gas tax rates to be more moderate.

Let me conclude by discussing an alternative to taxes: borrowing. While states and localities do not have the ability like the federal government to use borrowing as a substitute to taxes for almost any kind of public spending, borrowing can still vary among the states. Some states have much larger debt burdens than others.

North Carolina is among the states with the lowest public debt. Measured as total state and local (counties and cities) debt per capita – that is, total state and local debt for every person – North Carolina ranks 48th, meaning 47 states have a higher relative debt level and only two states (Wyoming and Idaho) have a lower relative debt level than North Carolina. In dollar terms, North Carolina’s total state and local debt per person is half the average for all states.

I know this column has presented many, many numbers and rankings. But studying taxes lends itself to numbers. Hopefully I’ve provided a good summary of taxes in North Carolina. Now it’s up to you to decide if our tax system works well or if some tinkering is required.

Mike Walden is a William Neal Reynolds Distinguished Professor Emeritus at North Carolina State University.

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