Governor Easley has proposed raising the sales tax by $607 million per year. If sales tax rates are raised in North Carolina, the big winner is the federal government. Since 1986 the sales tax has not been deductible against federal income tax. In a memo to me dated April 16, 1999, Dave Crotts of the Fiscal Research Division of the N.C. General Assembly quantified this effect at 15 percent:
"I think it would be safe to say that for $100 million of property taxes the citizens of Wake County will be able to receive at least $15 million of federal relief through the income tax and $4 million of state relief."
An efficient tax costs 1 percent or 2 percent at most to collect. Government can't simply look at its own cost of collection but must consider the cost to its citizens of collecting the tax -- in this case 15 percent.
If the state collects $1 from a sales tax that it otherwise could have collected from deductible taxes 15 cents is automatically sent by the taxpayers to Uncle Sam to apply on the federal debt.
Gov. Easley's plan is exactly what the big spenders in Washington would want our General Assembly to do. The $607 million in sales tax revenue generated yearly would cause a loss to North Carolina taxpayers of $91 million, which would go to Uncle Sam.
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