You Decide: Are Our Taxes Fair and Our Spending Effective?
By Dr. Mike Walden
Two topics of interest to most people are taxes and public spending. So whenever I find research focusing on these two areas – especially if they’re applied to North Carolina – I think it’s worthy of mention.
Two new studies recently came across my desk fitting this profile. One looked at the fairness of state and local taxes for all fifty states and the District of Columbia (DC). The second study examined the effectiveness of K-12 school spending, also in all states and DC.
Let’s look at the tax study. I first have to define some terms. In measuring the fairness of a tax system, economists look at the portion of a household’s income paid in taxes and then define three possibilities. If the percentage of income paid in taxes rises as the household’s income rises, then this is called a “progressive” tax system. If the income percentage paid in taxes falls as the household’s income rises, the tax system is termed “regressive”. Finally, if the percentage of income paid in taxes doesn’t change with the household’s income, a “proportional” tax system is the result.
Let me be clear about the regressive tax system. It does not imply higher income taxpayers pay less dollars in taxes than lower income taxpayers. In reality, higher income folks usually pay more in taxes. Instead, as a percent of their income, a regressive system means the percent is higher for lower income taxpayers than for higher income taxpayers.
Now on to the new study. The focus was on state and local taxes, so no federal taxes were included. Households were divided into five groups of 20 percent by their income level, that is, the 20 percent of households with the lowest income, the 20 percent of households with the next lowest income, and up to the 20 percent of households with the highest income. Since the focus was on working households, elderly (65 and older) households were omitted. The study developed an index of how the percentage of taxes paid changed through the five groups.
Here are the key findings. The vast majority of states – 45 to be exact – have a regressive tax system. This is mainly because two of the mainstays for localities and states – local property taxes and state and local sales taxes – have the same rates for everyone, regardless of income. Also for the sales tax, lower income households tend to spend a relatively larger portion of their income on products and services subject to a sales tax than do higher income households.
Using the study’s index, the state of Washington has the most regressive tax system among the 50 states and DC. One reason is Washington has no state income tax, so more of the state’s taxes must come from property and sales taxes, where lower income households often pay a higher percentage of their income. California, DC, Vermont, Delaware, Minnesota and New Jersey have mildly progressive tax systems.
And what about North Carolina? Among the 45 states with a regressive tax system, North Carolina’s is the 15th least regressive. Stated another way, 30 states have a more regressive tax system than North Carolina.
The second study on the effectiveness of K-12 school spending was actually done by a former colleague of mine at N.C. State who has since moved on to another university. While there are many studies of education looking at inputs by states – like spending per pupil – and outputs – such as test scores – my former colleague could find few, if any, that put outputs and inputs together to measure effectiveness.
For the output measure, he developed a measure of educational achievement based on data from the National Assessment of Educational Progress, an annual test administered by the federal government and widely considered to be one of the best available. He then divided this measure for each state and DC by the state’s (and DC) spending per pupil. Prior to this calculation, he adjusted each state’s (and DC) spending per pupil by cost-of-living differences between the areas.
The results are very interesting. Using the measure of effectiveness, Florida has the most effective schools and West Virginia has the least effective schools. And – do I hear a drum roll – North Carolina has the 6th most effective K-12 schools using the methodology of my former colleague’s study.
Please be clear, these findings are not arguments for or against either more school spending or less school spending. They’re simply a report of what current K-12 spending seems to be getting each state (and DC) in effectiveness of the spending.
We should constantly evaluate North Carolina on our state’s progress in many areas compared to other states. These comparisons give us one reading of “how we’re doing”. The two new studies I’ve reviewed give us comparisons on both sides of the public sector – taxes and spending. You decide what they mean for future public policy.
Walden is a William Neal Reynolds Distinguished Professor and Extension Economist in the Department of Agricultural and Resource Economics at North Carolina State University who teaches and writes on personal finance, economic development and public policy.