House Budget Misses Opportunity for Tax Relief to Working Poor

The FY2007-09 budget currently being debated by House members includes a proposed 5 percent state Earned Income Tax Credit (EITC) aimed at providing assistance to North Carolina’s “working poor.” An EITC would reduce tax bills or provide cash payments to low-income families who file income taxes. The payments would be based on a sliding scale: as income increases the payments decrease.

Proponents claim the EITC is an effective way to provide lower-income residents with financial relief, while encouraging them to work their way up to a higher income level. Many of the same lawmakers who support the EITC, however, also staunchly oppose another measure that would help the working poor of North Carolina: tax cuts.

It is widely accepted that sales taxes and excise taxes (taxes on specific items such as gasoline or cigarettes) are highly regressive. That is, they consume a much larger share of income from the poor, as compared to the rich. In turn, a cut in sales and excise taxes would provide the lowest income earners with much greater tax relief relative to the middle- and upper-class income brackets.

“Temporary” Sales Tax Hurts the Poor

Because low-income people use a significant share of their income to buy everyday items, such as clothes and toiletries, they were the hardest hit by the “temporary” sales tax increase passed in 2001. The House budget would extend the remaining quarter percent of the sales tax hike, again breaking a promise to completely eliminate the temporary sales tax increase in 2003.

Families struggling to make ends meet could use immediate relief from North Carolina’s sales tax rate — one of the highest in the nation and nearly twice that of neighboring Virginia. Instead of waiting and budgeting for another six months in anticipation of an EITC, those in need would see an immediate difference in their pocketbooks if the sales tax were permitted to return to its lower rate.

Pain at the Pump

With gas prices shooting up once again, North Carolinians are feeling the pinch in their wallets. Especially hard hit are the working poor. North Carolina currently imposes the 13th highest gas tax in the nation and in the Southeast ranks just behind Florida. (But recall that Florida does not tax income: see accompanying chart.)

The state’s gasoline tax is composed of two parts — a flat rate of 17.5 cents per gallon, plus a variable rate based on the wholesale price of gasoline. The variable portion of the tax is adjusted every six months (Jan. 1 and July 1) based on a weighted average of motor and diesel gasoline prices in the state during a six month period ending three months prior to each adjustment date. The irony of this system of taxation is that as gas prices rise, so does the gas tax. This only accelerates the amount of money we all pay at the pump.

In response to skyrocketing prices (and public outrage) legislators last year passed a cap of 12.4 cents per gallon on the variable portion of the tax. This capped the overall state tax at 29.9 cents per gallon. Unfortunately for hard working North Carolinians — especially the working poor — the House budget does not continue the gas tax cap. With experts predicting that gas prices will reach as high as $4 a gallon this summer, the gasoline tax will increase significantly. Without the cap, North Carolina’s gas tax could jump into the top five in the nation — right behind other high-tax states, such as New York, California and Connecticut.

Because there is a lag in the calculation of the variable portion of the gas tax, however, the real sticker shock will come in January as the newly calculated tax kicks in. High gas prices this summer will thus be followed by even higher prices come Christmas time.

House Budget Chooses Bigger Government

Instead of choosing to relieve the tax burden and allow the working poor to keep more of their money, the House has chosen to expand government dependency. In their view, reducing harmful sales and excise taxes equals less tax revenue. It seems the House would rather take more taxes from the poor with one hand, and then give back with the other hand a “state-approved” reimbursement.

Although the EITC may have theoretical value as an effective means of helping the poor, while encouraging them to enter the labor force, in practice the EITC is being used as another government-run wealth redistribution program. The end result is another government bureaucracy that requires more employees and administrative costs, and more money taken out of the hands of taxpayers to be spent at the government’s discretion. Tax cuts that primarily benefit low-income residents allow them to actually keep more of the money they earn, thereby lessening their dependency on government.