Critics of Tax Modernization Plan Need to Explain Flaws in Data

Critics of Tax Modernization Plan Need to Explain Flaws in Data

Reporters, legislators, analysts and the public should all be advised to be leery of the statistics in a new report criticizing tax modernization proposals. A recent report produced by the N.C. Budget & Tax Center (BTC) purporting to show the impact of an income tax elimination plan evaluated in a study by the Civitas Institute contains either a grossly misleading omission or fatal math error.  Civitas is raising serious questions that should be answered before the BTC’s figures are given any serious consideration by those involved in tax modernization efforts.

Specifically, how does BTC explain average households with $11,000 of income making nearly $16,000 worth of purchases?

 The Details: The BTC report claims that the plan being developed by NC Senate leadership would shift the tax burden to the poor and middle class. To support this claim, BTC presents a chart that includes data that raises more questions than answers.

For instance, BTC claims that under the proposed tax plan, a household with average income of $11,000 (the average they use for the lowest 20 percent category) would see their state tax burden increase by $544. Curiously, BTC does not include what their calculations would mean in total dollar amount in state tax burden. To get an estimate, however, one can examine research from the Institute on Taxation and Economic Policy (ITEP), the source for BTC’s report. The most recent data available from ITEP shows that they estimate the total state tax burden under the current tax code for the lowest 20 percent income households in NC (average income of $10,300 at that time) at $731.[1]

Adding in the $544 in “average tax change” BTC presents in their most recent study for that income group brings the total tax burden they estimate under the proposed tax plan would be roughly $1,275.[2] Recall, the new tax plan would only impact households via the sales tax.

In order to pay $1,275 in sales tax, one must make $15,839 in purchases, under the 8.05 percent sales tax rate proposed in the income tax elimination plan. But according to the BTC chart, average income of these households in the lowest 20 percent of income is only $11,000.

So how does BTC explain households with an average $11,000 of income making nearly $16,000 worth of purchases?

 Similar calculation errors can be found at the other income levels evaluated in the BTC study. Keep in mind, expenses like day care, Medicaid-covered health care and groceries purchased with food stamps – all items commonly utilized by low-income households in North Carolina – would not be taxed under the Senate’s proposed tax reform plan. The BTC’s statistics don’t line up right.

Clearly, something is missing from the Budget & Tax Center’s calculations — something that demands an explanation.

[1] This figure is calculated by totaling the percentages of state taxes used by ITEP (6.2% state sales and use taxes plus 0.9% income taxes) to get 7.1%; and multiplying that by the average income ITEP uses of $10,300 at that time.