NC sales-tax hike is unneeded

By John Hood

Raleigh, NC – When North Carolina Democrats are in power, their go-to source of new revenue is to raise sales taxes.

Oh, I realize you’ve probably read or heard something different during recent election cycles. Left-wing politicians, activists, and editorialists have claimed that the GOP-controlled General Assembly increased North Carolina’s sales-tax burden by expanding the scope of the sales tax to include some previously untaxed services.

It was a grossly misleading claim. Republican tax legislation did, indeed, expand the sales-tax base a bit, just as Democratic politicians had long advocated. But the GOP legislature also made sure the overall sales-tax rate went down, by fighting off Democratic attempts to extend a previously enacted sales-tax hike.

Due to GOP tax policy over the past decade, in other words, North Carolina’s state sales-tax burden went down, not up, by hundreds of millions of dollars a year. Alas, some of this effect was offset by increases in county sales taxes. Who is responsible for those hikes? Democrats, overwhelmingly. Democratic politicians authorized those sales-tax referenda and Democratic voters were most likely to favor them.

Sure, Democrats will raise income taxes, too, if they can. That’s happened several times during past recessions. But their sales-tax hikes are usually larger, and more lasting.

Which brings me to Gov. Roy Cooper. He’s raised sales taxes in the past, as a state legislator. Now, a huge sales-tax increase is a central recommendation of a new report from the NC FIRST Commission, created by Cooper’s Department of Transportation.

I’m not going to denigrate the efforts of the NC FIRST Commission. Its report is thoughtful, thorough, and full of important insights. The commissioners are absolutely right that North Carolina’s system for financing highway construction and maintenance is outdated and inadequate.

Because of increases in fuel efficiency, North Carolinians are paying less and less gas tax per mile they drive. Moreover, as electric cars become an increasing share of the vehicle fleet traversing our roads, the link between highway use and highway revenue will erode even faster.

Unlike public safety, education, and other state services to which North Carolinians are entitled by law, our highway network was never supposed to be funded by general revenue. Roads are a public enterprise like water and sewer service. As much as possible, they should be funded by users in proportion to use. Ideally, motorists would be charged directly according to which roads they use and how many miles they drive them. The same would be true for commercial vehicles, though the ultimate cost is inevitably shared by consumers of transported goods in the form of higher prices.

Taxing motor fuels used to be a reasonable proxy for charging by the mile. Not so much anymore. The NC FIRST Commission suggests that directly charging by mile traveled is the best long-term replacement. That’s true. But the political will isn’t there, yet.

Instead, among other things, the commission proposes raising North Carolina’s sales tax and using half the proceeds to reduce the gas tax. The net tax hike would come to as much as $6.3 billion over the next 10 years.

Why do Democrats prefer to raise the sales tax, even though they know it’s regressive? Because it’s the easiest to accomplish. Voters tend to dislike tax increases, but they dislike sales-tax increases the least.

Voters tend to dislike tax increases, but they dislike sales-tax increases the least.

I don’t think Republican legislators will go along with this. They shouldn’t. But there’s a better idea in the NC FIRST Commission report: redirecting some current sales-tax revenue. North Carolina collects about $470 million a year in sales tax on tires, auto parts, repairs, and related businesses. These goods and services exist solely to help motorists drive roads. Their sales even vary somewhat by miles traveled.

The General Assembly ought to consider transferring some of that annual revenue to highway construction and maintenance. North Carolina’s recent sales-tax collections have been strong. There’s enough fiscal capacity to do this while also funding other services.

Let’s spend our existing revenue more prudently. Hiking sales taxes isn’t the answer. It never was.

John Hood is chairman of the John Locke Foundation and author of the forthcoming novel Mountain Folk, a historical fantasy set during the American Revolution.