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ADVICE: Let’s talk about taxes – the right way

State and local governments collect tens of billions of dollars in taxes from North Carolina residents every year. The total bill averages $5,300 per person per year.

Most Americans pay more than we do. According to the Tax Foundation’s latest Facts & Figures report, state and local taxes consume an average of 11.2% of income across the country. North Carolina’s combined tax rate is 9.9%. That’s lower than Virginia’s 12.5% ​​and Maryland’s 11.3%. But it is higher than Texas (8.6%), South Carolina (8.9%), Georgia (8.9%) and Florida (9.1%).

However, taxes divided by income are not the only relevant measure. At each tax level, there are better and worse ways to collect the money. Some systems are fairer than others, more efficient than others, or more favorable to investment and employment than others.

In fact, the Tax Foundation rates North Carolina’s tax code as the ninth most favorable for economic growth, given our relatively low taxes on property, payroll and business income and our relatively flat taxes on personal income and retail sales. When our corporate taxes are completely eliminated by the end of this decade, North Carolina’s position will improve. If lawmakers follow this up by cutting franchise or capital gains taxes, this will improve even more.

There is plenty of room for a reasonable debate about tax policy. Still, the debate will be more constructive if everyone keeps these three facts in mind:

  • When making national comparisons, reporting only state taxes can be misleading. Public finance systems vary widely. For example, here in North Carolina, we fund public schools primarily with state dollars, not local dollars, and we have done so for decades. In other states, local property taxes play a predominant role.

Other states also have state highway systems funded by county taxes. We do not. That’s the main reason our motor fuel tax (62 cents in most cases) is one of the highest in the country. Motorists in North Carolina no longer pay for transportation. We pay differently. What we finance with gas taxes, we finance in other places with property or sales taxes. When I did a full accounting of the numbers several years ago, our transportation tax burden was below average, not above average.

If you come across stories comparing the tax burden where you live to the tax burden elsewhere, take a look at the fine print. If it refers only to state taxes, only local taxes, or only one type of tax, you’re probably consuming clickbait and not really useful information.

  • Partly because of such structural differences, North Carolina’s mix of taxes deviates from the average. We rely more on personal income taxes (31% of 2021 tax collections) and sales taxes (26%) than the average state (26% and 23%, respectively). On the other hand, property taxes make up 23% of collections here, compared to 30% in the average state.

This will change somewhat as the General Assembly continues to pursue tax reform. Just don’t expect these changes to be dramatic.

  • When it comes to taxes, who is the fairest of them all? As it happens, we need to turn to a mirror to answer this question, because we don’t all share the same definition of fiscal “fairness.”

I’ve written many columns – and even the better part of two books – on this subject, so I won’t attempt to summarize all the arguments and evidence here. But I will make this point clear: Those who pay state and local taxes also pay federal taxes. I’m not just talking about federal income taxes. I mean federal payroll taxes, excise taxes, and the portion of the rates and business tax burden borne by consumers and employees.

No serious study of federal, state, and local taxes together shows anything other than a progressive system in which wealthy households pay a greater share of their income in taxes than middle-income households. The latter in turn pay more than poor households.

Honestly? Not fair? Let’s discuss – as long as the discussion remains connected to reality.

John Hood is a board member of the John Locke Foundation. His latest books, Mountain Folk and Forest Folk, combine epic fantasy with early American history (FolkloreCycle.com).

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