February 26, 2005

North Carolina: Easley Proposal Soaks Poor

Democratic Governor Mike Easley has released his budget proposal. The Easley plan would hike the state's cigarette tax from 5 cents per pack (among the lowest in the nation) to 50 cents.
The plan would also keep a previously enacted half-cent sales tax hike that is scheduled to go away in July, but would allow a temporary income tax hike on the wealthiest North Carolinians to expire.

The plan would further load up on sales taxes by raising the tax rate on various items to a uniform 7 percent. This is partly being done to comply with the Streamlined Sales Tax Project (SSTP folks are trying to get rid of complexity in sales tax laws, and multiple rates are a primary culprit.)

Affected industries are raising a stink about the proposed sales tax base expansion, arguing that newspapers and movie theaters are special industries that shouldn't be taxed the same as other areas of consumption. Some are pointing out that not all of the base-expanding proposals are necessary to comply with SSTP, but I think that's missing the larger point. A basic goal of the sales tax should be to tax all personal retail consumption the same way. Easley's proposals here are clearly regressive in their impact, hitting low-income taxpayers harder than wealthier taxpayers, but represent a clear improvement from a different kind of tax fairness perspective: they would make it more likely that the amount of sales tax you pay depends only on how much you spend, not what you spend it on.

The cig tax hike should probably be thought of the same way-- probably the right thing to do, because the tax rate is so much lower than most other states', but still regressive.

So Easley has gotten things half right-- he's clearly gotten the message that the tax system is currently inadequate to fund services, but doesn't seem to understand the need to make North Carolina taxes more equitable.

And don't look now, but N.C. lawmakers are making noise about allowing a lottery. As this article points out, the "everyone else is doing it, so why can't we" argument seems to be taking hold. With all surrounding states now getting at least some revenues from a lottery, the argument goes, plenty of Tarheels are spending their cash in other states-- so why not bring this money back home?

This is a much bigger topic that demands a separate post. But let's just start by pointing out that lotteries are never just about taking back revenues that are being spent in other states. Inevitably, states end up actively encouraging people to spend more on an activity that most people agree is wrong. More on this later.


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