Tax Justice Digest stories about North Carolina

In recent weeks, North Carolina Governor Mike Easley signed into law the state's 2009 budget.  Totaling around $21.3 billion, the legislation is supposed to respond to the current economic climate, but falls short. 

Lawmakers had earlier proposed two new tax cuts, one regressive and one progressive. The regressive cut was a repeal of the state's gift tax. North Carolina is one of the last remaining states with a gift tax and, as CTJ has previously pointed out, the tax is absolutely necessary to ensure that the estate tax is collected. If a state does not tax large gifts, wealthy residents can avoid the state's estate tax by giving their assets to their children before they die.

The progressive cut proposed earlier was an increase in the state's earned income tax credit (EITC).  The credit, which will increase from 3.5% to 5% of the federal EITC, will provide relief for the working poor.

Neither progressive advocates nor anti-tax advocates got everything they wanted in the budget deal that was approved. Both tax cuts were delayed until 2010. That means that wealthy North Carolinians will be able to avoid the estate tax if they wait until 2010 and then give their assets to their children. It also means that the needed help provided by a boost in the EITC will not yet be available at a time when prices are rising and increasingly burdening low-income North Carolinians.

The fact that these tax cuts were delayed is a result of the General Assembly's desire to balance the budget.  But as CTJ has noted, even a 5% state EITC in North Carolina is not enough.  In order to offset the burden of state and local taxes for a family of four, the EITC must be set at no less than 11% of the federal EITC. Next year, lawmakers should reject cuts in the gift tax that will result in reduced estate tax collections and instead focus on the needs of the working poor.

As we mentioned last week, this is the season for fiscally irresponsible sales tax holidays to purportedly give relief to working people on their back-to-school shopping. Sales tax holidays are a bad idea for the states' budgets and tax-payers alike. Low-income families probably cannot time their purchases to take advantage of a sales tax holiday, and it can be an administrative headache for retailers and government. Sales tax holidays are also poorly targeted to low-income individuals compared to other policy solutions such as low-income tax credits.

Now another group of states is ready to forgo needed tax revenue in exchange for a few dollars off the purchase price of various goods. These states include Alabama, Iowa, Missouri, North Carolina, Tennessee, and Virginia among others with holidays scheduled Friday through Sunday.

Meanwhile, a Birmingham News editorial points out that the sales tax holiday is a "gimmick" that has allowed state lawmakers to divert attention from their outrageously regressive tax code. Alabama is one of only two states that doesn't exempt or provide a low-income credit for its sales tax on groceries. If that were done, Alabama consumers would save far more money than they do on a three-day sales tax holiday (an average family of four would save about seven times as much). But instead of exempting groceries from sales taxes or raising the state's second-lowest in the nation income tax threshold, lawmakers pretend to help low-income Alabamians with a few tax-free shopping days a year.

Georgia's sales tax holiday began on Thursday and exempts articles of clothing costing less than $100, personal computers cheaper than $1500, and school supplies under $20. This week, the Atlanta Journal-Constitution mentioned some of the more amusing exemptions covered by that state's sales tax holiday. These exemptions include corsets, bow ties and bowling shoes. As the author noted, guys headed to their first day back in school "might combine the bow ties and bowling shoes, then just head straight for the restroom to collect their free swirlie." The article also mentions ski suits, highly unlikely to be big sellers in Georgia, and adult diapers, seemingly unrelated to the average family's back-to-school needs. Georgia lawmakers may want to revise their list of exemptions to concentrate on discounting necessities, or better yet, end this farce once and for all.

The North Carolina House of Representatives this week approved and sent to the Senate a measure that would raise the state's earned income tax credit (EITC) from 3.5 percent to 5.0 percent of the federal EITC.  The measure is bittersweet: assistance to the working poor but still not enough to lift families out of poverty and the grasps of regressive taxation.

A 10 percent state EITC in North Carolina would be more effective and would cost less than one percent of the current budget, according to estimates by the NC Justice Center.  Research suggests that, among its many benefits, the EITC increases workforce participation and encourages asset building. Some surveys conclude that families invest their EITCs in education, savings accounts and transportation improvements, investments that, in turn, promote economic security among low-income workers. 

At the state level, an EITC helps to offset the regressivity of the sales and property taxes, the burdens of which fall primarily on low-income earners.  In North Carolina, the wealthiest one percent of families spend 6.1 percent of their incomes on state and local taxes.  Compare that with the poorest fifth of families in the Tar Heel state, who devote 10.6 percent of their earnings to state and local taxes.

One in 5 North Carolinians benefit from the EITC.  If the bill passes, under North Carolina's new EITC structure these residents would be able to receive from the state an additional credit equal to 5 percent of their federal EITC.  Unfortunately, even with this boost from the state, low-income residents would still be subject to regressive sales taxes greater than this amount.  A report by the NC Justice Center estimates that an 11 percent state EITC would be needed to offset the burden of state and local sales taxes on a family of four.

The North Carolina Senate seems to think that cutting taxes for the wealthy should be one of its top priorities.  This week the Senate passed a bill which if approved by the House and Governor Mike Easley, would repeal the state gift tax.

In response, the North Carolina Budget and Tax Center released a brief discouraging the House and Governor from approving this bill as part of its overall budget.  The brief explains that the gift tax is a progressive tax and that repealing it would negatively impact estate tax collections as more wealthy people convert their estates into gifts to reduce their taxable wealth.  Estimates indicate that about $18 million would be lost each year if the gift tax were repealed, but as the North Carolina Budget and Tax Center points out, this number underestimates the true cost because it does not include revenue lost from increased estate tax avoidance.  Repealing this tax would not only increase tax unfairness in North Carolina and harm state revenues, but would also send precisely the wrong message at a time of economic difficulty and ever increasing income inequality.

Despite all this, however, some legislators in Michigan want to delay the introduction of that state's EITC.  Last year, the state passed an EITC for the first time.  Now, proponents of delaying the EITC argue that, given the state's current business and fiscal problems, the government simply can't afford the tax break.  Of course, many of these senators are the same ones who have been advocating against any new business taxes in the state to replace revenue lost with the repeal of the Single Business Tax.  It's true that the state is not in good fiscal condition, but during economic downturns anti-poverty measures become more important, not less.  Michigan voters should urge their lawmakers to keep their promise to the working poor.  For more information on state EITCs, try this helpful website.  For more information on how EITCs work, read this ITEP policy brief.