NC Leads In Tax Increases

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NC Leads In Tax Increases

Special Report - January 19, 2010
North Carolina is the only state in the country to have responded to the sagging economy by simultaneously raising its individual income, sales, cigarette, and alcohol excise taxes in 2009, according to a report released in December by the Tax Foundation. The report, “A Review of Significant State Tax Changes During 2009,” compared states’ responses to closing budget gaps in 2009 due to the recent economic downturn. North Carolina stood out in its consistent choice to raise taxes.

North Carolina was one of nine states to increase the individual income tax. This increase was in the form of “a tax surcharge of 2 percent on those incomes over $60,000 and 3 percent on those with incomes over $150,000, retroactive to January 1, 2009.” Five states actually lowered their individual income tax rates. Additionally, North Carolina was one of only five states to increase its sales tax. This sales tax increase came in two parts with the rate rising from 4.5 percent to 5.5 percent on September 1, 2009 and to 5.75 percent on October 1, 2009. The current combined average state and local sales tax rate of 8.07 percent in North Carolina catapulted the state from 26th highest in the nation to eighth. In addition to surprising much of the nation by banning the state’s premier cash crop, tobacco, in most bars and restaurants, North Carolina also raised the cigarette sales tax from 35 cents to 45 cents. That is still one of the lowest cigarette taxes in the country, even with 14 other states also raising their cigarette sales taxes in 2009. Only four other states joined North Carolina in raising excise taxes on beer, wine, and spirits.

North Carolina also became the third state to impose the “Amazon Tax,” which taxes “out-of-state companies that have affiliate and advertising relationships with in-state companies.” New York’s “Amazon Tax” is currently being litigated in court based on a U.S. Supreme Court ruling that such taxes violate the U.S. Constitution. The governors of California and Hawaii vetoed similar taxes. Some large retailers with these affiliate and advertising operations shut down those activities in North Carolina and Rhode Island, which also imposed this new tax, rather than comply with the new tax.

The Tax Foundation report found that most of the states that chose to raise taxes in 2009 “aimed their taxes at specific groups such as high-income earners, smokers, or out-of-state business transactions. These revenue sources may provide short-term relief but can cause substantial economic harm to the state economy in the medium and long term.”

“On one hand, North Carolina government leaders promote and praise their ‘economic incentives’ used to attract businesses to North Carolina, while at the same time they continue to take more of the average North Carolinians’ hard-earned money through rising income and sales taxes,” said Bill Brooks, president of the North Carolina Family Policy Council. “The most shocking part of this new report is not that North Carolina raised taxes, but that North Carolina raised taxes in every area this report considered, and was the only state to do so.”