Taxes on table pinch the poor
When the dust settles on the state’s second stormy budget season in a row, North Carolinians could pay more taxes than they did before — and the state’s lower- and middle-income families could fare the worst.
To help close a projected $ 1.5 billion shortfall this year, lawmakers are considering allowing local governments to raise the sales tax by a half-cent per dollar. They’re considering a delay for two tax breaks approved last year — a larger child tax credit and a larger personal exemption for married couples. And some are thinking about tax increases on cigarettes, beer, wine and liquor.
All those possibilities would disproportionately affect the lower and middle classes, legislators and budget watchdog groups agree. They would also further a decades-long shift in North Carolina’s tax burden toward those with the lowest incomes.
“It looks that way right now, unfortunately,” said Elaine Mejia, senior fiscal policy analyst for the N.C. Budget & Tax Center, a tax policy organization that a broad spectrum of political groups, Republican and Democrat, turn to for expertise. “The big three [that are] getting the most discussion and that would bring the most revenue happen to be the most regressive options out there.”
That is why some lawmakers are looking for alternatives — such as closing tax loopholes, another way of describing tax breaks for specific corporations or industries — to take the burden off the poor.
Supporters of government services as well as opponents of any tax increases agree that sales taxes are paid disproportionately by the poor when measured as a percentage of income. Lower-income families spend a greater share of their income on taxable goods
— and less on such items as housing or savings — so they spend a greater share on the taxes that go along with those goods.
Income taxes, in contrast, are progressive, meaning that the wealthy pay as great a percentage of their income as lower-wage taxpayers pay, and often a greater percentage.
Many of the proposals being considered this year would be regressive. The state Senate’s tax proposal, approved two weeks ago and now in the House for consideration, proposes a half-cent local-option sales tax in exchange for an end to state payments to local governments. The Senate budget delays the child tax-credit increases and the elimination of the “marriage penalty.” Combined, those steps would raise $ 372 million per year.
“The Senate did as well as it could do with what we had to work with,” said Senate leader Marc Basnight, a Manteo Democrat. “… I believe the sales tax was the place to go.”
In the House, still more tax proposals have been introduced that would disproportionately hurt the poor, including five separate bills to increase the cigarette tax anywhere from 25 cents per pack to $ 1 per pack. Other proposals would raise taxes on beer, wine and liquor.
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The poor hit harder
An analysis by the N.C. Budget & Tax Center shows that raising the cigarette tax from 5 cents to 30 cents per pack would bring in as much as $ 175 million in new tax revenue. But the group’s analysis shows that lower-income workers would pay a greater proportion of their pay toward the new tax than the wealthy.
For instance, those making less than $ 15,000 would pay on average $ 28.77 more a year on cigarette taxes, or roughly one-third of a percentage point of their pay. In contrast, the top income earners — those making $ 314,000 or more — would pay on average $ 37.30 more a year, or five one- thousands of a percentage point. In other words, the poor spend a greater share of their income on cigarettes than the wealthy spend.
Such numbers upset those who worry what budget cuts will do to children, the poor, the disabled and other needy groups.
Mark Silver of Durham, a clinical social worker whose career choice has fostered in him a keen interest in state budget policy, said lawmakers and Gov. Mike Easley should be preserving services by raising taxes on those with the greatest ability to pay. Cutting services while also raising taxes on lower-income families is wrong, he said.
“Those are the taxes [lawmakers] feel most comfortable raising, because [low-income families] don’t have political power, because they don’t give big campaign contributions,” Silver said. He has written to politicians urging them to raise his own income taxes rather than the sales tax. “The legislators say, ‘OK, let us tax these people, plus maybe the middle class or the working class, who also don’t have a lot of clout. We’ll put all the tax burden on them.’ “
Even those who oppose all tax hikes and want the General Assembly to cut spending more deeply take umbrage at proposals to raise the sales tax. Joyce Kerawiec of Kernersville, near Winston-Salem, is among them. Kerawiec is a member of the state chapter of Citizens for a Sound Economy, an organization that urges political candidates to sign a no-tax pledge each election year.
“The sales tax obviously is going to affect the lower incomes,” said Kerawiec, who runs a real- estate development firm with her husband. “They don’t have disposable income. Their money is spent purchasing the things that they need on a day-to-day basis. So of course it will hurt them more.”
Kerawiec believes there is enough “waste, fraud and abuse” in state government to make sufficient cuts in spending to close the budget gap. And she points to statistics showing that North Carolina is a high-tax state within the Southeast when it comes to state taxes.
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Ranked in the middle
That’s only one way of looking at it, however. Others prefer to measure all state and local taxes when ranking tax burdens in all states. Such a method accounts for the state’s relatively low property taxes and for the fact that North Carolina’s state government finances a greater share of public school costs than many others.
By that measure, North Carolina’s tax burden falls smack in the middle — 29th in the nation. That number provides the impetus for some to support higher taxes.
State Rep. Paul Luebke, a Durham Democrat and frequent critic of regressive taxes, said there is an argument for promoting certain sales-tax increases when they apply only to products such as cigarettes. These “sin” taxes, Luebke said, can be justified to discourage an unhealthy habit such as smoking.
Luebke is co-sponsor of a proposal this year to raise taxes on cigarettes, beer, wine and liquor. But he does oppose a proposal to give local government the option of raising the general sales tax by a half-cent. “It puts too much of a burden on the middle- and low-income majority,” he said.
Some progressive tax proposals are under discussion in the legislature this year. Among them are closures of so-called tax loopholes. Such proposals are generating some support among House Democrats; for example, 15 lawmakers have signed on to a measure to close a loophole that benefits the banking industry.
The loophole allows banks to deduct both principal and interest from investments in tax-exempt bonds. Most payers of income taxes are allowed to deduct only the interest; the proposal in the House would establish the same standards for banks.
“They can be described, I think, as unfair,” said state Rep. Verla Insko, a Chapel Hill Democrat and co-sponsor of one loophole proposal. “They are exceptions to our tax requirements. The more tax exceptions we give to higher-income earners and corporations, the greater burden we are asking our moderate- and low-income workers to bear.”
Closing the banking loophole would require banks to pay an additional $ 100 million in corporate income tax. But the industry, with a strong presence in Charlotte and an important role in the state’s overall economic health, has succeeded in blocking the measure for years.
Still, closing loopholes is viewed favorably by legislators who are reluctant to support outright tax increases in a year when polls, including a recent one conducted by House Democrats, show voters opposed to the idea — and in a year when all 170 seats of the General Assembly come up for election.
“I’m not saying raise taxes,” said state Rep. Jennifer Weiss, another co-sponsor of the loopholes bill and a Democrat from Cary. “I’m saying collect a tax that should be collected.”
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Threading the needle
The political dynamics in the House are complex. Many Democrats oppose the depth of the service cuts in the Senate budget. Most Republicans oppose any level of tax increase. With just a 62-58 Democratic majority in the House, Speaker Jim Black will have trouble finding 61 votes in favor of any one idea. That’s one reason no action has occurred so far in the House on either revenue bills or the budget.
One possibility some lawmakers are considering is a package of tax changes combining progressive and regressive proposals.
Mejia, of the Budget & Tax Center, said the sales-tax increases would be more palatable if they were part of a broader package that also included, say, an earned-income tax credit for the poor or a marginal income-tax increase for the very rich.
Something is better than nothing, she said: “We’re not going to throw our body in front of a cigarette tax if it’s part of an overall package that’s progressive.”
GRAPHIC: 2 graphics Tax Burden In North Carolina Staff State Rankins Staff
