Tax Justice

A Policy Statement Adopted by the House of Delegates, North Carolina Council of Churches, November 9, 2000

Current State of Taxation

North Carolina faces a financial situation that is easy to summarize:  Tax cuts during the last half of the ’90’s have left the state with a revenue stream inadequate to provide the services which are expected by the state’s citizens and to respond to unexpected emergencies.  However, because the state’s political climate is less than hospitable towards tax increases, solutions to this situation will be more difficult to implement.

Oliver Wendell Holmes once stated that “taxes are the price we pay for a civilized society.”  In order for a civilized society to thrive, taxes at all levels of government must be sufficient to meet the legitimate needs of society, especially the modern equivalents of the biblical widows and orphans.

It has become both fashionable and common for Americans to complain about our high taxes.  However, these anti-tax attitudes need to be seen in context.  When looked at from an international perspective, we learn that the overall tax burden in the United States falls well below the average for the world’s developed countries.  In these industrialized nations, taken together, taxes account for almost 37% of  the total economy; in the United States, the comparable figure is just under 30%.

When looked at from a national perspective, we find that federal taxes as a percentage of the national economy are at their highest point since World War II.  This, however, fails to tell the whole story.  Federal taxes on most Americans have, in fact, fallen over the past two decades.  It is only the wealthiest Americans, those who have seen their incomes go up the most, whose taxes have been on the rise.

At the state and local government levels, tax cuts have been the norm over the last several years.  By one measure, North Carolina currently ranks 38^th in the nation in state and local taxes, down from 30^th only five years ago.  (On the balance between state and local taxes in North Carolina, see “History of the North Carolina Tax System,” below.)

Unlike many other states, North Carolina struggled to keep its budget balanced in the 1999-2000 legislative session.  While other states have bountiful surpluses, North Carolina lawmakers were using their last reserves and making risky cuts in human services to make ends meet.  There are three primary causes for this struggle:

• During the mid ’90’s, the General Assembly approved tax cuts which now total more than $1.4 billion annually.
• The state lost two lawsuits and had to refund more than $1.2 billion dollars of taxes wrongly collected.
• Hurricane-induced flooding in eastern North Carolina created almost a billion dollars in unexpected expenses.

Now state and local leaders search for easy answers to tough questions.  Many of our leaders support the lottery, the most unfair and unstable tax of them all.  Others promote increases in taxes that would burden the poor more than the rich.

Too many leaders have portrayed taxes as the cause of all societal problems – including the struggles of the middle class to stay afloat economically and the perceived breakdown in the American family.   Too few leaders have advocated taxes that are adequate for government to play an appropriate role and that are equitable for all our citizens.  The rhetoric is of those who think of the tax collectors as the maligned sinners and cheats of biblical times, not those entrusted to collect the revenue that a democratically elected government requires to meet the needs of its people.

An Issue for People of Faith

The North Carolina Council of Churches, along with many of our member bodies, has long been concerned with questions of economic justice.  Five years ago, our House of Delegates, concerned about the impact of budget cuts on people in poverty, noted:

One of the clearest and most persistent themes of the Bible is God’s special care for the weaker members of society, i.e., the orphans, widows and refugees.  Equally clear is God’s requirement that protection and provision be made for them (Deuteronomy 24:19; Exodus 22:22; James 1:27).  God requires that justice and mercy be done, and these imperatives are addressed to the entire community (Micah 6:6).  Justice, in the Hebrew scriptures, means defending the cause of the poor and the needy (Jeremiah 22).  In the New Testament, Jesus is presented as one who was anointed to liberate the oppressed (Luke 4) and who identified with the destitute and the despised, “the least of these . . .” (Matthew 25:31).

While the Bible does not give us explicit direction on the issues of tax policy for North Carolina, neither is it silent on matters of taxation.  Several familiar biblical stories are actually about taxation:

• Almost overlooked in the story of Joseph and his “coat of many colors” is that the heart of Joseph’s proposal for preparing Egypt for the coming years of famine was a 20% tax on the produce of the land (Genesis 41).  It was this tax-generated produce which carried the Egyptians through the “lean” years.
• Gleaning was established in the Israelites’ law (Leviticus 19:9-10) as a way for those who owned the capital of that day (i.e., land) to care for the poor and destitute.  Those with agricultural produce were not to harvest all of it; rather, some was left so that those in need could help themselves.
• The story of Jesus which ends in the familiar “Render to Caesar the things that are Caesar’s. . .” arose when Jesus was asked whether the Jewish people should pay taxes to Rome (Mark 12:13-17).  His answer seems to approve of those taxes, while recognizing that there are also things that belong to God.  And the story of Zacchaeus (Luke 19:1-10) indicates that taxes could be exorbitantly or fraudulently high.

The Qualities of a Good Tax System

Experts generally agree on several principles to follow when fashioning good tax policy.  The principles most consistent with biblical principles of justice are:

• Equity.  Those with greater means should pay more of their income in taxes than those with less means.  People with similar resources should pay about the same.
• Adequacy.  Taxes should be substantial enough to meet the appropriate needs of government.  Taxes should grow at the same rate as the needs of the people grow.

Analysis of how well the current tax system meets these principles can point to recommendations for 2001.

History of the North Carolina System

For much of its history, North Carolina allowed local governments to assume a preponderance of the responsibility for funding and providing government services, including schools, roads, social services and courts.  In the early 1930s, however, many local governments defaulted on their loans.  The General Assembly, in response, instituted and increased the state income and sales taxes that provide the majority of state revenue even today.  With these taxes, state government funds most of the operations for public schools, roads, and courts.  Today, state government accounts for 72 percent and local governments for 28 percent of total state and local taxes.  Nationally, the split is more even, with states accounting for 61 percent and their localities for 39 percent.

Because the state has such major responsibilities, it limits the taxes that local governments can levy.  The property tax remains the biggest source of revenue for local governments, but the local portion of the sales tax is a much more important source for North Carolina local governments than in other places.

Anti-tax advocates note that state taxes are higher than average.  They note that our income tax rates are higher than those in neighboring states.  But they do not mention that the state pays for many services usually paid for by local governments and that our overall taxes are generally low.

How Equitable and Adequate are Our Taxes Today?

In 1999, North Carolinians at the bottom of the economic ladder paid about 10 percent of their income in state and local taxes.  The wealthiest North Carolinians paid about 9.2 percent of their income in state and local taxes.

The recent spate of tax cutting has not helped remedy this disparity.  While there have been some broad-based tax cuts, such as repeal of the state sales tax on food, other taxes that had helped make the tax code more equitable, such as the inheritance tax and the intangibles property tax, have been eliminated.

In 1994, a research report found that North Carolina ranked near the bottom in terms of tax burden on businesses.  After this report, the state reduced business taxes significantly through cuts in the corporate income tax rate and the creation of numerous tax credits for businesses locating or expanding in the state.  Although the rhetoric was that these credits would help lure businesses to economically distressed rural counties, the majority of the tax credits have gone to businesses in our most prosperous areas.  In other words, recent tax policy changes have made the code less equitable.

Furthermore, tax cuts have helped to deprive the state of revenue needed to support legitimate public needs – such as mental health, public education, and social services.  Several recent signs indicate that the state’s current revenue stream is not adequate.  These signs include:

• the disarray and disrepair of the state’s mental health system, including long waiting lists for needed services;
• the increasing reliance on bond issues to finance current needs and, in the case of the university bonds, to repair the results of neglect; and
• the lack of necessary funds for critical social services, such as protecting children from abuse.

In addition to policy changes that have made our taxes less equitable, there are also shifts in the economy that affect fairness.  When the sales tax was created in the 1930s, people bought goods at their local store.  They bought very few services.  Now services, which are largely untaxed, are a growing share of the economy, while goods are falling behind. Affluent people generally spend more of their income on services than do low-income people.  For example, low-income people pay sales taxes on lawn mowers used to cut their grass, while an affluent person is more likely to pay for lawn service, with no tax on the service.

Moreover, people are not buying just from local stores, but also from mail-order houses and over the Internet.  The affluent are more likely to have access and to purchase goods over the Internet and from out-of-state retailers.  Supreme Court decisions have limited a state’s ability to force out-of-state retailers to collect sales taxes on goods bought by the state’s citizens.  While people have a legal responsibility to pay a use tax on these goods, many do not, because of either a lack of understanding about the law or the low likelihood of getting caught.

Politically Popular Sources of New Revenue

Any discussion about new sources of revenue centers around political “do-ability.”  The lottery tax is the most popular new tax.   In addition to its negative effects on family life and youth, however, the lottery tax violates all principles of good tax policy.  The lottery tax is extremely regressive, meaning that it takes more of the income of poor people than it does from the wealthy.  It is unreliable, as lottery taxpayers quickly tire of the game and go to find other ways to gamble.

Local governments, meanwhile, seek permission to increase sales taxes.  Sales taxes are often more politically popular than property taxes because they are collected only by small amounts at a time and the popular perception is that “everybody pays them.”  But because sales taxes are on goods only and because low-income people tend to spend more of their income than upper-income people, sales taxes are regressive as well.

Recommendations

1.       Target tax relief at those who need it the most.

• Tax relief should be targeted at low-income working families through a state Earned Income Tax Credit (EITC).  Fifteen other states have adopted state EITCs based on the federal credit. The federal credit lifts more people out of poverty than any other program except Social Security.
• While property taxes are generally low in North Carolina, they can pose a special burden on senior citizens who live in houses that have appreciated in value dramatically but who have not had their incomes increase at that rapid a rate.  Relief for these seniors, through changes in the homestead exemption, should be a priority.

2.       Close tax loopholes.   State Treasurer Harlan Boyles recommended a one-year moratorium on these “tax expenditures” to combat the state’s 2000-01 tight money picture.  Some could be eliminated entirely and the proceeds used for needed services.  Among our recommendations are the following:

• Tax banks equitably.  NC banks can currently exclude both the principal and the interest from tax-exempt bonds. The repeal of this loophole would generate about $60 million.
• Make out-of-state businesses pay their fair share.  Some credit card businesses have substantial numbers of NC customers but pay little corporate income tax since they have no “physical presence” in the state.  Since they are profiting from business conducted in NC, a change in state definitions of “presence” could ensure that such companies pay an appropriate amount of taxes.  This could generate $46 million.
• Tax luxuries fully.  Certain luxuries, such as expensive cars, boats, airplanes, and cable television, are not subject to the full sales and use taxes.  Revenue from taxing these items completely would be $25 million.

3.       Amend the investment and jobs tax credit. This credit should be used to boost economic development in less-affluent areas.  However, the vast majority of these newly created corporate tax incentives are accruing to businesses in the most affluent counties.  Eliminating the investment and jobs tax credit in these affluent counties could save $75 million by 2004-05.  Furthermore, if North Carolina continues to offer corporate tax incentives for relocation to or expansion in the state, through the William Lee Act or other means, these corporations must be held to certain standards. They must guarantee a living (or self-sufficiency) wage to their workers and pay an exit fee or similar compensation if they close operations in the state.

4.       Advocate a tax code that makes sense for the 21st century economy.  As noted above, the sales tax is in special need of modernization in ways which will make it less regressive.  The sales tax should apply to services as well as goods and should apply equally to items purchased at a local store or over the Internet.  Just the inclusion of services could generate an additional $287 million annually.  Some exclusions for necessary services, such as health care, could be maintained.

5.       Reject a lottery.  The lottery is objectionable on moral grounds.  It is also objectionable on every principle of equitable and just taxation.  (For more information on the Council’s opposition to the lottery, see the Legislative Policy Statement of April 23, 1987, and Raleigh Report for May 19, 1997; March 8, 1999; and June 1, 1999.)

6.       Support reasonable tax increases. North Carolina has not done all it should and could do to support programs that advance the common good.  For this reason, we will support reasonable tax increases, both for individuals and corporations, that improve the equity and stability of our society.  These increases should be progressive, shifting more of the tax burden from lower-income individuals to higher-income individuals and corporations.  And we call people of faith to an increased willingness to pay our fair share to support programs that promote justice in our society.

7.        Engage those who benefit from public services. When tax cutting was the rage, those most impacted by the results were silent.  Those who benefit from services directly (clients and their families, students, etc.) and those who serve them (universities, teachers, mental health and early childhood professionals, etc.) need to be actively involved.  We all share a responsibility to remind the North Carolina public of how their taxes are being used and whether or not those taxes are being used to create a more just society.