$1 Billion Tax Hike Will Deepen North Carolina Recession

Massive $1.1 Billion Proposed Tax and Fee Hike Will Deepen North Carolina Recession, Hit Poor the Hardest; Increase Year-Over-Year Spending by $400 Million

The FY 2009-10 North Carolina $20.7¹ billion state budget plan (SB 202) soon to be voted on by the House and Senate will cost thousands of North Carolina jobs and disproportionately hurt the state’s working poor. Rather than seize on a golden opportunity to implement meaningful spending reform, state lawmakers have instead chosen to impose one of the highest tax increases in state history on an already struggling North Carolina economy.

Massive Tax Hikes to Kill Jobs, Hit Poor the Hardest
The agreed-upon tax package raises the tax burden on struggling North Carolinians by nearly 6 percent above the currently existing tax structure. The change amounts to a severe cost-of-living increase on citizens at a time of historically high unemployment and bleak prospects for economic growth. How do state legislators expect North Carolina families already struggling to pay their bills to come up with another six percent to give to the State?

Following is a brief summary of the major tax increases being proposed, along with the estimated price tag for FY 2009-10:

• 1-cent Sales Tax Increase; Cost to Taxpayers: $803.5 million
  • This rate increase will raise North Carolina’s total sales tax rate to 7.75% in most of the state. The new rate would be 8th highest in the nation (two of the seven higher-rate states have no income tax). The bill includes an expiration date of July 1, 2011 for this tax increase.
  • Because consumers will be unable to absorb the added cost of the higher tax rate at the register, producers will be forced to cut prices, and therefore cut costs. Because the primary cost to producers is labor, jobs will be lost and worker pay will suffer.
    • North Carolina’s poorest and lowest-skilled citizens will be most vulnerable to the job cuts, reduced compensation and reduced job opportunity.
• Income Tax Surcharge; Cost to Taxpayers: $172.8 million
  • The “surcharge” would effectively force many taxpayers to pay 102 or 103 percent of their tax liability. The bill includes a sunset date of Jan. 1, 2011 for the surcharge.
  • The surcharge would be assessed beginning on single filers earning above $60,000 and couples earning above $100,000. Confiscating more money from North Carolina’s most productive citizens will discourage further investment in productive economic activity – hurting job growth.
    • North Carolina’s poorest and lowest-skilled citizens will once again be most adversely affected.
• 3 Percent Surcharge on Corporate Income, Cost to Taxpayers: $23.1 million
  • This tax would force companies to pay 103 percent of their tax liability. The bill includes a sunset date of Jan. 1, 2011 for the surcharge.
  • North Carolina already imposes the highest corporate tax rate in the Southeast region.
  • Increasing the already high burden on companies will prompt companies to look elsewhere to start or expand their business.
  • The added burden will likewise force several companies out of business.
  • Jobs will be lost, and job growth will be slowed.
    • North Carolina’s poorest and lowest-skilled citizens will be most vulnerable to the job cuts and the reduction in job opportunity.
• “Sin” Taxes on Cigarettes, Alcohol and Tobacco; Cost to Taxpayers: $68.8 million
  •  A higher percentage of middle- and lower-income people smoke and drink alcohol compared to the wealthy. Such sin taxes therefore hit North Carolina’s poor and middle class hardest.

 Spending Up Year-Over-Year, Long-Term Spending Growth the Real Problem
North Carolina lawmakers need to be honest about the root of state government’s budget problems: dramatic, long-term uncontrolled spending growth.

• The proposed FY 2009-10 budget would appropriate $20.7 billion (including  $1.69 billion federal money to replace state spending “cuts”) – up nearly half a billion from an estimated $20.3 billion actual expenditures for FY 2008-09². The plan, in fact, would spend slightly more than the FY 2007-08 budget.
• Even amid the recession, a budget for FY 2009-10 of $20.7 billion would mark a continued, rapid escalation of state spending:
  • Spending would be up 30 percent in five years, and 45 percent in 10 years
• Digging yet another budget hole requires a long-term trend of out-of-control government growth. Even after adjusting for inflation, per person spending in the FY2009-10 budget would be³:
  • Up 12.5% over 15 years
  • Up 25% over 20 years
  • Up 82% over 30 years

UPDATE: This article has been updated to correct numbers erroneously included in the original version. The orignial version had FY 2009-10 spending at $20.86 billion, with federal funding at $1.86 billion. The correct numbers should be $20.7 billion and $1.69 billion, respectively. Other figures in the article have been adjusted accordingly. Civitas regrets the error.