North Carolina Considering Axing State Income Tax

Imagine the ugly line on your paycheck that says “NC Income Tax” not showing up next month. Well it could happen.

“The proposal would eliminate personal and corporate income taxes in exchange for higher state sales taxes levied against groceries, medical expenses and other currently tax-free services.”

With a Republican majority in the North Carolina State Legislature and a newly sworn in Republican, Pat McCrory, in the Governor’s office, talk of axing the North Carolina individual and corporate income taxes has cropped up. Rates are currently among the highest in the South.

Now that I have moved to North Carolina, and lived here for nearly a year, I’m finally starting to get a bit of a feel for the local politics. I’ve wanted to grow my understanding of them, but this is really the first interesting state issue since I’ve moved here. North Carolina’s “Amendment One,” which defined marriage as a union between one male and one female was passed before I moved to the state. A change to the state’s taxation strategy, as is being discussed, could save me a few thousand dollars per year, nothing to scoff at. This is why elections and local politics matter. Here’s a perfect example of a real, direct, immediate effect of November’s elections.

On the national scene, Bobby Jindal is leading the charge against state income tax, as he tries to do away with it in Louisiana. It’s already been done in a  Texas, Florida, Nevada, Washington, Wyoming, South Dakota, and Alaska (Tennessee and New Hampshire only tax interest and dividends). Kansas and Nebraska are discussing such a move as well. Conceptually, it is thought that shifting taxation from income to consumption would spur the economy. From the article linked above:

…shifting the tax base toward consumption allows wage earners and investors to retain more of their “next dollar earned,” especially if they choose to save or invest it. With a progressive income tax, they argue, “next dollars” are hit harder and harder, thus discouraging productivity and investment.

Would such a shift in the tax burden have a negative effect on the poorest North Carolinians? Possibly, but it could work to benefit everyone across the economic spectrum. Eliminating the state income tax (7.75% at the highest marginal rate) would help encourage talented individuals to locate in North Carolina, while eliminating the corporate tax (6.9%) would create more jobs. Such a situation would help those who are currently poor find better work in a then stronger economy. Tax savings from no longer paying corporate income tax would provide additional resources for companies to invest in their employees. Finally, I would suggest that the federal government already employs a very progressive income tax, and the state’s responsibility should not be geared towards redistribution, but more so focused on growth. If any government is responsible for keeping the Gini Coefficient in check or focusing on taxing the highly successful, the federal government already accomplishes such, so the argument is weakened when it is applied again at the state level.

It would certainly need to be carefully implemented over the course of a few years (with special research on retailers near state borders), but it could be a real boon to the local economy and would likely give me a much appreciated tax break. What do you think? Could it really happen? I’d bet on a hybrid that lowers taxes, but leaves some state income tax intact. 

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6 thoughts on “North Carolina Considering Axing State Income Tax

  1. I just have 3 questions:

    1. What is the difference this tax change will make in the amount of taxes you pay to the state each year? I did not research it so I don’t know what the % increase in sales tax will be.

    2. How are you calculating your answer to question 1?

    3. (I know this is unrelated, but since you mentioned it) Would you have voted for or against Amendment One?

  2. 1/2) I pay over $300 a month in income tax and I just starting working. I can only imagine what you would pay if you worked up here. It’d be atrocious.

    I don’t spend $300 total on groceries each month. If you figure 2k in spending each month, a 2% hike on that would only be $40 more. That’s big for me.

    3) I’ve become somewhat of a one issue voter. “Don’t tax me bro.” I’m certainly not the type to vote based on one issue, don’t mistake me for that, but it is clearly the one issue I care about the most. I’ve said it before and I’ll say it again, I don’t think anyone should get tax or social security benefits based on a personal relationship. I don’t think giving same-sex couples these benefits is good, however I would support what advocates call marriage equality by taking them away from all married couples. Not sure if I would have voted unless I saw a tax advantage. Would it have cost the state money? That thought process. You’re a good friend and a part of the Clemson family, don’t want to treat you poorly, but I don’t want to give folks tax advantages over me. Again, no emotional investment in the issue, not super important to me, just want to not pay more in taxes or see my govt spend more in outlays. I am ok with the child tax credit, not in principle, but just because I want kids to have a good upbringing. I think you cap it at $5k though.

  3. 1) Be careful of stating that something is tax-free… things such as groceries are still subject to tax, but at a lower rate.

    2) The question is really about what people perceive about the tax.. i.e. how do people regard the NC state pay tax vs. looking at the additional tax on a sales receipt. That will really determine what happens to future spending.

  4. Pingback: ESPNU Showcasing Softball Instead of National Signing Day? Clemson Manages Another Top 15 Recruiting Class | Home Runs, Apple Pie, and Rock 'n Roll

  5. Unless I’m missing something, a plan to make a switch like this is nothing more than shifting tax burdens from the wealthy to the poor. If you are against raising taxes on the wealthy, you should be very much against raising taxes on the poor. So does the NC plan include something to ease the burden on the poor where in many cases this could be a negative life changing event?

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