Does the Tax Foundation overstate North Carolina's tax burden?
Critics of the nonprofits rankings of state and local tax burdens note that it leaves out the amount paid by North Carolinians in federal taxes.
That's important because the Internal Revenue Service allows you to deduct your state and local taxes from your income when filing. For states such as North Carolina that rely heavily on a state income tax that means a reduced federal tax burden.
That would affect North Carolina's overall tax burden compared to other states.
"Compared to the rest of the Southeast, North Carolina is probably one of the biggest beneficiaries of the state and local tax deduction," said Gerald Prante, an economist with the Tax Foundation. "But nationwide, it's probably not that high. Almost all of the states in the Northeast benefit more."
The Tax Foundation does not account for the deduction in its rankings because of the complexity of the calculations and a lack of good data, Prante said.
The amount the deduction benefits individual taxpayers depends on how much they earn. Taxpayers who earn less and don't itemize their expenses don't benefit, but those in the middle and upper class who itemize do, as long as they aren't affected by the alternative minimum tax.
Comments
Federal deductibility is a red herring
September 5, 2008 - 8:44am — JosephColettiState and local governments cannot change federal tax policy, so the question of tax burden should focus on state and local taxes exclusive of federal deductibility, whci.
Sales tax can be deductible in states without an income tax and property tax is deductible everywhere - in both cases subject to the same narrow window of having enough deductions to itemize but not so many with so high an income as to bear the alternative minimum tax (AMT). North Carolina taxpayers benefit less from these deductions than residents of other states even though North Carolina's state and local sales tax rate is comparable to Tennessee's, which has no income tax.