Who pays taxes in North Carolina?

As North Carolinians, we pay taxes to build communities that ensure everyone — Black, brown, and white — can thrive in every corner of our state. But policymakers in North Carolina have created a tax code that asks more of people with the lowest incomes. The latest edition of Who Pays?, released today by the Institute on Taxation and Economic Policy, analyzes the tax system as a whole— looking at personal income, sales, property, and other taxes at both the state and local levels — by income group in all 50 states.

Our tax code makes income inequality worse in NC

The data for North Carolina shows that we have an “upside-down” tax code. Also known as a regressive tax code, this means that people with the lowest incomes have to pay the greatest portion of their income in state and local taxes, while the richest North Carolinians pay the smallest portion of their incomes. In other words, our tax system makes income inequality in the state worse, not better. Our tax system has only gotten more regressive since 2013, as some politicians have pursued an agenda to eliminate state income taxes. During the past decade, legislators have enacted policies to create a flat and low personal income tax rate, and to phase out the corporate income tax entirely — meaning that starting in 2030, profitable corporations will pay no state income taxes in North Carolina.

ITEP’s analysis also includes a Tax Inequality Index, ranking each state for how their tax code effects income inequality. They find that North Carolina ranks 24^th for our tax code’s regressivity. That means 23 states have created tax systems that are fairer than ours.

The richest North Carolinians pay the lowest share of their income in taxes

North Carolina lawmakers have repeatedly passed policies that make our state and local tax system more inequitable in recent years. They’ve eliminated policies like refundable tax credits that support families with lower incomes in favor of cuts to personal and corporate income tax rates that mostly benefit wealthy people. The flat and low state income tax rate means a greater reliance on sales taxes, which are always regressive since poor families spend a greater chunk of their income on taxed goods.

ITEP’s comprehensive view of North Carolina’s tax code isn’t pretty. Their analysis shows the average effective tax rate by income group, from the bottom 20 percent of incomes to the top 1 percent. In North Carolina, the lowest-income taxpayers — those with incomes under $21,600 — face a higher state and local tax rate than any other income group. On average, families with incomes in the lowest 20 percent pay 10.5 percent of their income in taxes, compared with a 9.3 percent rate for the middle 20 percent, and a 6 percent rate for the top 1 percent. These richest 1 percent of North Carolina households have incomes over $697,400 per year. On average, North Carolinians with incomes in the bottom 20 percent have a 75 percent higher state and local tax rate than the richest 1 percent.

 The highest 1% number (partially covered) is 6%

Chart: NC Budget & Tax CenterSource: Institute on Taxation and Economic Policy. North Carolina: Who Pays? January 2024Get the data EmbedDownload imageCreated with Datawrapper

Tax cuts scheduled into future years will make NC more unequal — but we can demand better

This latest edition of Who Pays? also includes an “Lookahead” analysis of how planned policy changes will affect North Carolina. The scheduled elimination of the corporate income tax and personal income tax rate cut to 2.49 percent would cause North Carolina to fall 7 spots on the ITEP Inequality Index, making it the 17^th most regressive tax code in the nation.

Under this scenario, North Carolina families with incomes in the bottom 20 percent would pay a state and local tax rate that is 134 percent higher than the richest 1 percent of households.

North Carolina policymakers must address the fundamental problems with our tax code. Our state needs to keep the income tax on corporate profits and create a personal income tax with a higher rate for families in the richest 20 percent in our state. This makes that tax code fairer and gets our state the revenue we need to pay for the things that make our communities thrive: funds for things like public schools, beautiful state parks, and clean air and water.

But that won’t be enough to undo the damage caused by the tax policies that have been in place for over a decade. Ensuring that families with middle and low incomes — educators, childcare providers, bus drivers, and construction workers — aren't paying a greater share of their income in total state and local taxes requires refundable tax credits for these families. In the dozens of states that offer credits like earned income or child tax credits, they help balance out the regressive effects of sales taxes and deliver boosts to health, education, and employment.

This article was co-written by Alexandra Sirota and Logan Rockefeller.