North Carolina's Growing Financial Problems

Budget shortfalls, tax increases and service cuts, it seems that whenever there is a bump in the road the state suddenly runs out of money to provide the services we have come to expect. 

And in the future there are growing fears that these occasional shortfalls will become endemic as we struggle to pay for roads and other badly needed infrastructures.
Why are state revenues so volatile, and, if our population and our state’s economy are growing, why won’t they be able to pay for our needs for the future?

State revenues depend heavily upon the income tax, which is a relatively volatile.  Indeed, only only a few firms pay most of the corporate income tax, and when their profits disappear in a recession, so do the taxes. 

At the same time, the sales tax isn’t keeping up as our state’s income rises.  The sales tax in North Carolina applies chiefly to goods. Unfortunately, as we spend a larger percentage of our paychecks on private services, the state is left with fewer dollars for the future.

The broad outline of reform is simple, even if the details are always contentious.  North Carolina needs to rebalance its revenues so as to depend less on the income tax, and to do that it must expand the sales tax to include services.  This will allow for lower income and sales tax rates and foster greater stability in revenues.  Beyond that, the volatile and chaotic system of corporate taxation needs to be reformed from the bottom up. 

Finally, the needs of local government must not be forgotten.  The division of revenues and responsibilities between state and local government has become blurred, with counties and cities increasingly required to shoulder burdens for which they have inadequate resources.