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No time to shy away from tax reform

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By Elaine Mejia

When state lawmakers arrive in Raleigh for this year’s legislative session, they will be confronted by the state’s first budget surplus since 2000.

Unfortunately, they will soon discover that the oasis of surplus revenues is more like a mirage.

At first glance, it will appear that revenues available for next year will be approximately $700 million more than what is needed to maintain current services.

However, after removing one-time revenues from the calculations, the so-called surplus evaporates completely, exposing the underlying precarious nature of the state’s financial position.

Moreover, slowdowns in certain areas of the economy are prompting tax experts to lower future revenue projections.

Hopefully, once lawmakers and the public realize that the perceived oasis is actually a mirage, there will be a renewed interest in and commitment to reforming the state’s tax system.

Now, more than ever, state government and government-funded nonprofit organizations need a modern revenue system.

Consider the fact that state and local taxes consume about 10 cents of every dollar of our total personal income in the state.

This proportion has remained essentially unchanged for decades.

But because our revenue system is so antiquated, it fails to capture aspects of the modern economy, such as phone calls made over the internet or services such as car repairs.

Therefore, policymakers have been forced to raise tax rates in order to collect the same share of total personal income.

And while the overall size of government remains the same, the rise in tax rates creates the public perception that spending is out of control.

Even worse, the eroding tax base and the nominal rate increases made in response have resulted in a shift in the tax burden onto lower-income households.

In fact, the only taxpayers to see an increase in their tax responsibility between 1989 and 2002 were the bottom 20 percent of income-earners, whose average annual income was around $9,100.

And the greatest tax reduction relative to income during that same period was for the richest 1 percent of income-earners, whose average annual income was over $800,000.

It’s no wonder, then, that many taxpayers are skeptical of tax reform when their taxes have increased and yet they have not seen any dramatic improvement in public services as a result.

With each year that passes, the task before us becomes greater as the tax system becomes more outdated, and as the effects of tax-rate increases fall disproportionately on those who are least able to afford them.

We must reverse this vicious cycle if North Carolina is to become a state in which government and its partners in the nonprofit community are to be viewed as and used as instruments for achieving the public good.


Elaine Mejia is director of the Budget and Tax Center at the N.C. Justice Center in Raleigh.

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