New tax plan likely to spur property and sales tax hikes

Jun. 17, 2013 @ 10:53 AM

Last week, the North Carolina Senate's chief tax writing committee approved the third different major tax reform proposal put forth by state legislative leaders this year. It is, by any measure, an historically unprecedented $1 billion-a-year tax cut that would enact steep reductions in personal income tax rates and an outright elimination of the corporate income tax.
Interestingly, however, while Senate leaders spoke at-length in glowing terms about the idea of reducing North Carolina's income taxes to rates below those in other southeastern states, they remained conspicuously silent on another elephant in the room: the issue of local taxes and the demonstrable fact that other states have kept their statewide rates low by increasing local property taxes or sales taxes (or both).
This raises an important question: Will the proposed state income tax cuts for North Carolina simply lead to higher property taxes and sales taxes? A look at the facts makes clear that such a result will be hard to avoid.
Local governments primarily fund their services (like firefighting, public safety, roads and education) through state support and a mix of local property and sales taxes. As we've seen over the past two years, declining state revenues have contributed to steep reductions in state aid to local governments. This, in turn, has forced these local governments to turn to property tax and sales tax increases in order to continue to  provide their services.

Likewise, state governments also have to rely on sales tax revenues in the same way.
As a result, states with low income tax rates (or no income taxes at all) often have higher property taxes and sales taxes than those that rely more on income tax rates. According to a recent report from the nonpartisan analysts at the Washington, DC-based Center on Budget and Policy Priorities, states without an income tax have property taxes that are eight to 12 percent above the national average. Sales taxes in these states average 18-21 percent above the national average.
Looking across the Southeast, the implications of the planned reduction in the income tax for North Carolina are impossible to deny. While all of these states have lower income tax rates than North Carolina, nine out of 10 of them also have higher property taxes or sales taxes. Furthermore:
-- Residents in six out of 10 other southeastern states face higher property taxes as a percentage of their income than North Carolinians. On average, the residents of these states pay $338 more in property taxes than North Carolinians in terms of revenues per capita.
-- Similarly, seven out of 10 other southeastern states require their residents to pay more in sales taxes as a percent of income than North Carolina does-an average tax bill $266 higher than what our state residents currently face, as measured by per capita revenue.
-- Closer to home, four of our five neighboring states (Florida, Georgia, South Carolina, and Virginia) have higher property taxes as a percent of income than North Carolina. Residents in these other states pay on average $335 more per capita than residents of North Carolina. Tennessee is the only neighboring state with lower property taxes, but it also has the highest sales tax as a percent of income.
All five neighboring states either have higher sales taxes or higher property taxes, reinforcing the fact that: a) revenue has to come from somewhere, and b) the less revenue raised from personal income taxes, the more it has to come from regressive sources that disproportionately impact low and middle income families.  
Given the reality in these neighboring, lower-income tax states, legislative leaders need to honestly confront and grapple with the question of whether property and sales tax hikes will be necessary to replace the revenue lost to their proposed income tax cuts.
Based on decades of experience, it's hard to see how the state will be able to avoid such a pattern.

Allan Freyer is a policy analyst at the North Carolina Budget and Tax Center.