YOU DECIDE: What's North Carolina's tax burden?
One of the items on the agenda of a new state tax commission, which issues its report next year, is the state's tax burden.
Of course, taxes are always an issue, not only those from the average citizen's wallet, but also from the perspective of the state competing in today's global economy. One of the factors many businesses consider in their location decision is the level of state taxes. With businesses increasingly mobile today, the tax factor could have added importance.
Tax burden measures the cost of providing governmental services in a state. There are at least three issues that must be confronted before developing some numbers measuring the tax burden.
One is an apples and oranges -- false comparisons -- issue.
Because all states don't divide their public functions between state and local levels (county and city) the same way, tax burden measures for states should be done for state and local governments combined. If not, states that pay for more public functions at the state level -- such as North Carolina -- would automatically look more costly than states that pay for more functions at the local level, such as Ohio.
Another issue is what economic base should be used in calculating the tax burden.
Two alternatives are commonly used: people and income. The measure based on people calculates the average state and local taxes paid by each person in the state. This is the per capita (per person) tax burden. The other measure based on income divides all state and local taxes paid in the state by the total income earned by the state's residents. This shows the percentage of income paid in taxes.
The last issue is what should be included in the tax burden.
Of course, taxes should be included, but what about various fees and charges levied by governments? These would be items like tuition paid to public universities and colleges, fees paid to public hospitals, charges at public garages and license fees.
Although public fees and charges are important, they are fundamentally different from taxes. Public fees and charges are for direct services and benefits received by an individual. So if you park in a municipal parking garage, you pay a fee. If you go to a UNC-system school or community college, you pay tuition for the education received. In contrast, taxes are used for projects and services that benefit the public. Here we'll only consider the tax burden measured by taxes.
In 2005, each North Carolinian paid an average of $3,268 in state and local taxes. The state had the 30 th highest tax burden by this measure. Also in 2005, 10 percent of the state's personal income was taken in state and local taxes, ranking the state 28 th highest by this calculation. So both measures show the state's tax burden near the middle of the pack.
However, North Carolina's tax burden rose slightly in recent years. Using the percentage of personal income taken in taxes as the measure, the state's tax burden was 9 percent in 1980, ranking the state 33 rd , and 9.5 percent in 1990, ranking the state 36 th .
But before you automatically conclude the state is moving in the wrong direction with taxes, consider another complicating factor.
Studies show that tax revenues spent on fundamental governmental services such as education, highways and public safety actually can enhance a state's competitive position and counteract some of the negative impacts from taxes. North Carolina's spending on these core services, as a percentage of total state spending, is higher than the average in other states and has risen in the last 10 years.
So although North Carolina's tax burden edged up in recent years, so has its spending on the public services that businesses and citizens value. Maybe this is why the state is still a leader in job creation and attracting new businesses.
But as always, you be the judge; you decide!
Dr. Mike Walden is a William Neal Reynolds Professor and extension