- In spite of the critics’ claims, the wealthiest North Carolinians shouldered a larger share of the state income tax liability following the 2013 tax reforms
- The lowest-income tax filers saw their share of the total income tax burden fall
- Income gains in the first year of tax reform were significant, with more than 92,000 low-income earners climbing to a higher income level
North Carolina’s 2013 tax reforms, instead of being a “huge windfall” for the rich as the Left claims, in fact resulted in high-income households paying a higher share of state income taxes, while middle- and low-income families ended up paying a smaller share.
To look at it another way, after the tax reforms tens of thousands of people climbed into the ranks of the top earners, even as more people escaped the lowest-income levels and as the ranks of the middle class swelled. A closer look at the numbers reveals what happened.
Left-wing critics have long complained that a move to a lower, flat income tax rate would “shift taxes from the wealthy onto others.”
But in the first year of its implementation, the only filers whose share of the state’s total personal income tax burden increased were the state’s top earners.
In 2013, the last year before the tax reforms, filers earning $100,000 and above paid 48.6 percent of state income taxes. In 2014, that share rose to 50.7 percent.[i]
And not only did “middle-class” taxpayers (earning between $25,000 and $100,000)[ii] pay a lower share of income taxes after the reforms, the lowest-income earners (under $25,000) likewise paid a smaller share.
So much for the narrative that the income tax reforms would shift the income tax burden on to the backs of the middle and lower classes.
Rising Incomes a Strong Driver of Changes
The rise in the share of the total income tax burden paid by the state’s wealthiest filers was driven largely by an increase in the number of filers earning above $100,000, which climbed by 27 percent – or roughly 83,000 people.
The ranks of middle-income earners ($25,001 – $100,000) also swelled by about 7 percent, seeing a gain of more than 91,000 filers year-over-year.
The number of low-income filers – those with income less than $25,000 – dropped by more than 92,000, for a decrease of more than 3 percent.
In short, just one year after the 2013 tax reforms, nearly 100,000 low-income North Carolinians climbed up to a higher income level, while about 83,000 taxpayers rose from middle- or lower-class level to the ranks of the state’s wealthiest.
2014 also saw an overall net increase of about 83,000 North Carolina state tax filers compared to 2013. The majority of this growth likely represents an increase in organic job growth, because IRS data on state migration shows that from 2013 to 2014 North Carolina imported on net just under 13,000 new taxpayers.[iii]
These data points reflect the positive trends of North Carolina’s economy. A decrease in low-income earners signifies positive income gains by low-skilled workers, while the increase in new filers mostly represents a growing workforce, but also the fact that North Carolina is an attractive destination for job creators and productive workers.
To sum up, this data strongly contradicts claims by critics that the personal income tax rate changes would force middle- and lower-income filers to shoulder more of the state’s tax burden.
[i] Source: Office of the State Controller, North Carolina Comprehensive Annual Financial Reports from 2015 and 2016. Available online at: https://www.osc.nc.gov/public-information/2016-cafr
[ii] The income thresholds were chosen as they matched the available data from the CAFR; also because in the previous income tax code the highest marginal tax rate of 7.75% kicked in at $100,000 for married filers filing jointly. This seemed to be a compelling reason to classify $100,000 and up as the top income earners for this analysis.
[iii] Source: Internal Revenue Service, SOI Tax Stats, Migration Data 2013-14. Available online at: https://www.irs.gov/uac/soi-tax-stats-migration-data-2013-2014