Improving the Sales Tax: A Critical Step to a Modern Revenue System

EXECUTIVE SUMMARY

The state sales tax in North Carolina represents nearly 30 percent of the state’s total revenue each year. In 2011, the states sales tax generated $5.9 billion in state revenue.

The sales tax is regressive, which means that it asks more from those with the least ability to pay. Lower-income families spend a greater share of their income on things subject to sales tax.

North Carolina’s sales tax is also narrow, outdated and unstable. The tax does not apply to the vast majority of transactions in the fastest-growing area of consumption—services.

Some North Carolina legislators are considering a shift away from the personal income tax and toward a revenue system that primarily relies on consumptionbased taxes which would require greater contributions from low- and moderateincome households in total taxes. Such a shift, if revenue-neutral, would raise the state sales tax rate to 13.88%.

Broadening the base of the sales tax to services would align the sales tax with current consumption patterns and activity in the market