Lowering or capping income taxes could lead to more property taxes

As state lawmakers deliberate the idea of capping state income taxes at 5.5 percent, AARPNC wants to take a closer look to determine if this is a sweet deal that could turn sour.

Lowering or eliminating our income tax burden sounds like a great idea on the surface. But capping income taxes or state spending has some negative consequences as other states and statistical evidence show us.

The retirement resource Retirement Living explains, “Many people planning to retire use the presence or absence of a state income tax as a litmus test for a retirement destination. This is a serious miscalculation since higher sales and property taxes can more than offset the lack of a state income tax. The lack of a state income tax doesn’t necessarily ensure a low total tax burden.”

The non-partisan Lincoln Land Institute in a 2015 report said property taxes are usually higher when income and sales taxes are lower.

The report summary states, “Property tax reliance is one of the main reasons why tax rates vary across cities. While some cities raise most of their revenue from property taxes, others rely more on alternative revenue sources. Cities with high local sales or income taxes do not need to raise as much revenue from the property tax, and thus have lower property tax rates on average. For example, this report shows that Bridgeport (CT) has the highest effective tax rate on a median valued home, while Birmingham (AL) has one of the lowest rates. However, in Bridgeport city residents pay no local sales or income taxes, whereas Birmingham residents pay both sales and income taxes to local governments."

Another example is highlighted by the Tax Foundation when looking at the budget shortfall in Kansas. That state recently eliminated their state income tax, but a weakening economy forced increased taxes in other areas. The state had to increase sales and cigarette taxes as well as eliminate nearly every deduction from individual tax returns.

Colorado is another place that was forced to shift state obligations. In a measure voters approved called TABOR, state spending limits were supposed to keep money in people’s pockets. But a Colorado State University Study found that, 80 percent of Coloradans actually pay more in taxes to supplement their local schools.

Denver’s Bell Institute, which has extensively studied the effects of the state spending restrictions explains, “Some local governments found TABOR's restrictions too constraining, and hundreds of cities, counties, school districts and special districts successfully appealed to voters over the years for a partial reprieve from some TABOR provisions.”

What capping an important tax stream could mean in North Carolina is the inability of the state as well as local governments to respond to community needs in times of economic downturns or crises. Since counties and municipalities set property tax rates, these could likely increase in times of need.

Responding to a real problem or an idea that needs more thought?

This year, the publication Carolina Living called the tax policy in the state a good mix. “North Carolina’s balanced tax policy and lower cost of living are refreshing changes from many other states.

When compared with other states, North Carolina income taxes fall into the national median. At 5.75 percent, they are on par with our neighbor Virginia, but lower than other neighboring states including West Virginia, Tennessee and Georgia at 6 percent, and South Carolina at 7 percent.

When looking at sales tax combined with other city and county taxes, only Virginia (5.6) and West Virginia (6.1) are lower than North Carolina’s 6.9 percent. Our other neighbors Georgia (7.0) South Carolina (7.2) and Tennessee (9.45) percent are all higher.

What this may show us is that North Carolina has a fairly balanced tax policy. What we are learning is that there is no silver bullet or secret formula when it comes to responsible state budgeting. Shifting income taxes to property, sales or services taxes is only a shell came that can hurt older adults and those on fixed incomes the hardest.

Let’s slow down the idea of capping income taxes until North Carolina can more fully examine the benefits and consequences of shifting its tax burdens.

Getty Images