Tax choices define policy options

Relatively speaking, North Carolina has a low rate of property taxation. That’s a basic fact of public finance — but its implications are varied, significant, and underappreciated.

Let’s run the numbers. According to the latest Census Bureau data, crunched by the nonpartisan Tax Foundation, North Carolina governments collected an average of $903 in property taxes per person in 2013. That ranked our state 39th. Our property-tax burden was about 37 percent lower than the national average. South Carolina, Georgia, Florida, and Virginia are among the Southeastern states that collect more property taxes per capita than we do.

Not surprisingly, then, North Carolina is less reliant on property taxes than are most other states for financing government services. About 25 percent of our total state and local tax collections come from property taxes, compared with 31 percent for the nation as a whole, 30 percent for Georgia, 34 percent for South Carolina and Virginia, and 36 percent for Florida.

Before you jump to the conclusion that the Tar Heel State has become the region’s tax haven, notice that I didn’t say we had the lowest taxes. Although recent state tax cuts have yet to be fully reflected in the comparisons, North Carolina probably still matches or exceeds most Southeastern states in overall tax collections.

Decades ago, North Carolina leaders made two big decisions that continue to influence our fiscal policy. First, they chose to fund public schools primarily at the state level, with income and sales taxes, rather than at the local level with property taxes. Second, they chose to fund roads primarily with direct taxes and fees on road users, rather than have cities and counties use property taxes to play a large role in highway finance.

Other states chose alternative paths. According to Tax Foundation calculations, for example, North Carolina is second in the nation in the share of its road expenses paid for by gas taxes and license fees, which was 63 percent as of 2013. South Carolina is similarly situated, but Florida (53 percent), Georgia (43 percent), and Virginia (38 percent) do things differently.

This is one reason why it is mistaken to claim, as some do, that because North Carolina’s gas tax is one of the highest in the country, we are paying too much for the roads we get out of the deal. If you combine gas taxes, car taxes, fees, tolls, and the share of property and sales taxes devoted to transportation, North Carolina has tended to be at or below average in total transportation revenue per person.

It might be better to pay for roads primarily by charging motorists per gallon of gas consumed (or the number of miles driven, in theory). On the other hand, it might be better to rely more on general sales and property taxes, as other states do. But before you can have a meaningful debate about this, you have to start with the same set of facts.

Here’s something else to consider about North Carolina’s relatively low property taxes: all other things being equal, our fiscal mix may be a net drag on the economy. According to a paper just published in the journal Regional Studies, property taxes are the least likely to deter investment, work, and consumption. Among the taxes that states and localities impose, concluded Florida International University economist Hakan Yilmazkuday in his study, the most counterproductive one is applying the full income tax rate to investment income such as dividends and capital gains. Not only does it dampen economic activity, he found, but it also tends not to raise the revenue legislators expect it to raise.

The proper policy would be to tax each stream of income once and only once. Taxable dividends and capital gains are earned from initial investments that were themselves already taxed, and are also usually derived from taxable corporations. That makes three layers of taxation.

Tax policy is about more than dollars and cents. It’s about how to deliver core public services at the lowest possible economic cost.

John Locke Foundation chairman John Hood is the author of Catalyst: Jim Martin and the Rise of North Carolina Republicans.
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