What happens when you tax the poor

We haven't heard much from N.C. lawmakers lately about tax reform, save for a flurry of discussion as the session opened in January. But N.C. Senate leader Phil Berger said then we'll have tax legislation before everyone goes home this spring. It's a priority for Republicans in the House and Senate. So it's coming.

That's a good thing. As we've said regularly here, our state has an antiquated tax code, based on an agricultural economy that no longer drives North Carolina. We need a tax system that produces enough revenue to meet the state's needs, of course, but one that also can absorb the volatility of booms and recessions, is attractive to businesses who might want to move here, and is fair.

We're worried, however, that Republicans don't care so much about that last part. Berger and others have been clear that new legislation will lower and maybe eliminate corporate income taxes and personal income taxes, and that the revenue lost from those sources will come instead from increased state and local sales taxes.

It's far from a new approach to tax reform. In an op-ed Monday for the New York Times, Katherine Newman notes that while the federal government has largely stuck with the principle of progressive taxation, states in the South and West have opted for the regressive route - lowering income taxes and raising fees and sales taxes, as North Carolina is considering.

That approach places a greater burden on the poor, said Newman, dean of the School of Arts and Sciences at Johns Hopkins University and co-author of "Taxing the Poor: Doing Damage to the Truly Disadvantaged."

What kind of damage is done? Newman analyzed the combined burden of sales taxes, plus state and local income taxes on poor households in 49 states, from 1992 to 2008. She found some unsurprising, but troubling, trends:

Southern states have far higher rates of strokes, heart disease and infant mortality than the rest of the country. Students drop out of high school in larger numbers. These outcomes are not just a consequence of a love of fried food or higher poverty levels. Holding all those conditions constant, the poor of the South — and increasingly the West — do worse because their states tax them more heavily. They have less money to buy medication, so their health problems get worse. High sales taxes make meals more expensive, so they shift to cheaper, unhealthy food. If people can’t make ends meet, they may turn to the underground economy or to crime...

The fact is, the more the poor are taxed, the worse off they are.

Newman notes that everyone ends up paying, eventually, as federal programs are forced to swoop in with Medicaid payments, food stamps and disability benefits. She instead recommends exempting necessities like food, medicine and children’s clothing from sales taxes, issuing tax rebates and preserving earned-income credits. Those measures would put more money in the hands of low-income households, and since poor families tend to spend all of what they take in, these protections would stimulate the economy and preserve the job base.

N.C. Republicans are moving the opposite direction. They've floated plans that would quadruple the the sales tax on grocery, and they've ratified a bill that repeals the state earned income tax credit for low and moderate income earners.

Lawmakers argue that lowering corporate and personal income taxes would attract more business to the state and spur job creation, all of which would benefit the poor. And while it's true that the state's corporate rate should be lowered to make us more competitive with our neighbors, that trickle down of goodness to the poor has been hard to find in states that make up for it with higher sales taxes. As for the states in the Midwest and Northeast with more progressive tax systems - they also boast better statistics in categories like premature death and property crime. 

North Carolina has long tried to distance itself from its Southern neighbors - which lag behind the nation in education and health rankings. Do we really want to follow their examples on taxation?

Peter St. Onge