North Carolina’s 2009 Tax Hike Unique in Southeast

In a recent USA Today article summarizing how states balanced their budgets this summer, Vice President of the National Taxpayers Union Pete Sepp declared, "With a few exceptions, states have been able to avoid the doomsday projections that big tax hikes were on the way."

Unfortunately, North Carolina was one of those “exceptions.”

As part of the FY 2009-10 budget, North Carolina lawmakers introduced more than $1 billion in new taxes. Indeed, of the three major taxes typically imposed at the state level – income, sales and corporate – North Carolina managed to raise all three. Specifically, the sales tax was increased by a penny, and lawmakers created a “tax surcharge” to be levied onto the corporate tax and personal income tax of single filers earning above $60,000 and married filers earning above $100,000.

State lawmakers insisted that these steps were necessary to balance the budget. Apologists justify the tax hike by claiming that “everyone else is doing it,” and therefore North Carolina’s economic competitiveness will not be harmed. That’s not true.

A report from the National Council of State Legislatures (NCSL) shows that among southeastern states, North Carolina stands virtually alone in its decision to impose massive tax hikes to balance this year’s budget.

Recall that North Carolina raised all three major state taxes – sales, corporate and income. By comparison, no other southeastern state raised even one of the three major taxes in 2009.

The most significant tax raiser among other southeastern states was Florida, with about $1.2 billion in new taxes. Another billion was raised from increased vehicle registration fees. Bear in mind, Florida has no income tax. The other southeastern states imposed little or no tax increases on its citizens. States that did raise taxes merely introduced minimal, targeted tax increases – while not raising any of their major tax rates. Meanwhile, Georgia, Louisiana and South Carolina refrained from raising any taxes whatsoever.

Conversely, North Carolina imposed a laundry list of new taxes, including: a higher sales tax ($803 million), corporate and personal income tax surcharges ($196 million), higher “sin taxes” ($69 million), and the new “Amazon” and digital taxes ($12 million).

These developments show that North Carolina’s decision to impose massive tax increases to balance its budget was rather unique among states in the region. Aside from Florida, which was blasted by the bursting of the housing bubble, the next most significant tax hike in the southeast was a $200 million increase in hospital assessments in Alabama – a paltry amount when compared to North Carolina’s billion dollars in new taxes. Why did North Carolina resort to such measures when virtually the rest of the southeast didn’t?

North Carolina’s dependence on tax rate increases doesn’t bode well for the state’s economic competitiveness. Currently struggling with 11 percent unemployment – tied for eighth highest in the nation – the Tar Heel State’s economy was already weighted down by some of the highest sales, income and corporate tax rates in the region.

The new higher tax rates included in this year’s state budget will further highlight North Carolina as a high-tax state in a relatively low-tax region, further harming a state already struggling with a poor level of competitiveness. The Tax Foundation currently ranks North Carolina’s business climate a dismal 39th in the nation, the worst ranking in the southeast. Likewise, the Small Business & Entrepreneurship Council ranks North Carolina 39th in terms of entrepreneur-friendly policy environments, also worst in the southeast.

Indeed, state government’s past policies have harmed North Carolina’s economic competitiveness, causing us to be among the hardest hit states during this recession. Unfortunately, the new taxes will put us even further behind.