The Rich Get Richer? North Carolina Contemplates Repeal of Gift Tax

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The North Carolina Senate seems to think that cutting taxes for the wealthy should be one of its top priorities. This week the Senate passed a bill which if approved by the House and Governor Mike Easley, would repeal the state gift tax.

In response, the North Carolina Budget and Tax Center released a brief discouraging the House and Governor from approving this bill as part of its overall budget. The brief explains that the gift tax is a progressive tax and that repealing it would negatively impact estate tax collections as more wealthy people convert their estates into gifts to reduce their taxable wealth. Estimates indicate that about $18 million would be lost each year if the gift tax were repealed, but as the North Carolina Budget and Tax Center points out, this number underestimates the true cost because it does not include revenue lost from increased estate tax avoidance. Repealing this tax would not only increase tax unfairness in North Carolina and harm state revenues, but would also send precisely the wrong message at a time of economic difficulty and ever increasing income inequality.

Instead of providing tax giveaways to those who need them the least, North Carolina could target its tax cuts more carefully by increasing the state Earned Income Tax Credit (EITC). The House appears set to approve precisely that, having proposed an increase in the EITC from 3.5% to 5% of the federal credit. Interestingly enough, the price tag of increasing the EITC is around $20 million -- roughly equal to the amount associated with the gift tax repeal. As the NC budget goes up for consideration, lawmakers should re-evaluate their priorities; the EITC rewards work rather than wealth by providing a tax credit to working low-income families. There is no better time than now to expand such a program. As Rep. William Wainwright points out, the "rise in gasoline prices, food prices, pharmacy prices, [and] trying to pay mortgages" provides excellent reason for "trying to find progressive ways to help [the working poor] make some household ends meet."

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