Thursday, January 3, 2013

Civitas proposes taxing insulin, artificial arms and legs

How cruel is the proposal by the John W. Pope Civitas Institute to replace North Carolina's progressive income, corporate, and privilege taxes with expanded sales, franchise, and real estate transfer taxes? It could literally cost amputees their artificial arms and legs and diabetics their insulin.

The sales tax elements of Civitas's proposal include increasing the tax rate from its current level of 6.87 percent on average (4.75 percent at the state level and 2.00-2.50 percent at the local level) to 8.05 percent and expanding the tax base. The largest part of Civitas' tax base expansion (and the largest gain in anticipated revenues) comes from "repealing current exemptions, preferential rates, and refunds" (p. 4). Civitas provides almost no detail for what these "exemptions, preferential rates, and refunds" include, leaving the impression that they are just a bunch of loopholes.

Every other year, the North Carolina Department of Revenue (NC DOR) compiles a list and estimates the value of tax "expenditures" (the value of exemptions, deductions, special rates, etc.) throughout the state's tax code. The latest estimates come from 2011 and generally provide estimates of the value tax "breaks" for 2011-12. An examination of these items reveals why Civitas was silent on these details.

The table below lists some of the items that would be included in Civitas' proposal.The table also lists the NC DOR estimate of the value of the state taxes saved in 2011-12 under the existing 4.75% rate and an estimate of how much the 8.05% Civitas sales tax would cost.

Some items that would be taxed under Civitas' sales tax proposal (amounts in millions)

2011-12 state sales tax savings
New/added Civitas Tax


Food for home consumption
$ 622.1
$ 1,054.3
Food sold in public school cafeterias, college cafeterias, and child & adult care centers
Food sold in bakeries and bread in thrift stores
Meals for the elderly and church meals
Water delivered through pipes
Prescription drugs and insulin
Durable medical equipment
Chiropractors’ nutritional supplements

Public school books
Sales by blind merchants
Annual sales by non-profits
Disaster assistance debit card purchases
911 charges


Sales taxes to non-profits
Sales taxes paid by local governments

Preferential rates

Motor vehicle sales (currently taxed at 3.0%)
Electricity (currently taxed at 3.0%)
Manufactured homes (currently taxed at 2.0%)
Modular homes (currently taxed at 2.5%)

Source: Items and 2011-12 state tax savings from NC DOR, North Carolina Biennial Tax Expenditure Report 2011. New/added Civitas tax calculated by applying a rate of 8.05 percent to the 2011-12 tax base amount (e.g., for food, Civitas tax of 1,054.3 = [$622.1 / 0.0475] * 0.0805).

As the table shows, repealing the exemptions, preferential rates, and refunds would impose or expand taxes on a whole host of necessities--literally, food, water, medicine and utilities. It would also impact charitable services, including meals for the elderly, meals in care centers, annual sales by non-profits (e.g., school band fundraisers), and goods used by non-profits. It would also tax hardship and emergency items such as sales by blind merchants, expenditures from disaster-relief debit cards, and 911 services. It would expand taxes on trailer homes and modular homes, and it would tax durable medical equipment (defined by the NC DOR as "prosthetic devices, mobility-enhancing equipment sold on a prescription, durable medical equipment sold on prescription, durable medical supplies sold on prescription," p. 88).

In 2011-12, personal income taxes, corporate income taxes, and franchise taxes brought in $12.5 billion of the state's $21.9 billion in tax revenue. Civitas proposes replacing this $12.5 billion with $4.0 billion from a new business license fee, $0.4 billion in an expanded real estate conveyance fee, and the rest (approximately $8.0 billion) in expanded sales taxes (this would come on top of the $5.5 billion that households already pay in state sales taxes).

You don't get $8.0 billion in revenues from closing just a few sales tax loopholes or from raising the tax rate by a percent or two.

While Civitas might counter that it would preserve some exemptions, the items in this list actually account for a substantial portion of Civitas' new revenues. For instance, grocery taxes raise about one-ninth of what Civitas needs to replace lost revenues; medicine and durable medical equipment raise about 1/12th; eliminating the refunds to non-profits and to local governments brings in slightly more than Civitas' transfer tax. And all these figures assume that Civitas wasn't fudging when it calculated its proposed sales tax rate.

Taxing North Carolina's poorest citizens for their food and water is heartless enough, but taxing artificial arms and legs, insulin, pencil sales by the blind, meals for the elderly, and disaster assistance is unconscionable.