CHAPEL HILL - Increasing use of flat taxes by financially strapped local governments contradicts the long-held notion that taxes ought to be fair to the extent possible, a University of North Carolina at Chapel Hill expert says. Most often, such taxes are disguised as fees or charges, but they are still taxes since they represent money citizens must pay whether they want to or not.
Writing in the current issue of Popular Government, economist Charles D. Liner of the UNC-CH Institute of Government said flat taxes, which fall heaviest on people with lowest incomes, are the state's most regressive.
"The perception that a regressive tax is unfair is based on one of the two basic principles of tax fairness, the ability-to-pay principle," Liner wrote. "This principle holds that taxes collected to pay for public services that benefit the entire community (or the entire state or nation) should be levied according to taxpayers' ability to pay those taxes. A regressive tax violates that principle because it imposes the heaviest burden on those least able to pay."
The other tenet of tax fairness, which also is relevant to such discussions, is the benefits-received principle, he said. It holds that taxpayers should pay for public services according to the benefits they receive. It's only fair, for example, for a family that uses municipal water lavishly to pay more than a family that uses it sparingly.
Governments can install water meters to monitor individual water usage, but general benefits such as public schooling, public safety and environmental protection must be paid for through taxes that distribute costs equitably among people in a community.
Flat taxes are far more regressive than the recently phased-out food tax, retail sales taxes or any other sales tax, Liner wrote. They are levies usually imposed as an identical amount per household by counties and municipalities without regard to the extent of services received by taxpayers.
"That their proceeds often are earmarked for certain services, like solid waste removal, school construction or public transportation, does not make them genuine fees or charges - it makes them earmarked taxes," he said. "The term 'flat' refers to the fact that these taxes are imposed on a 'unit' (such as a household or vehicle) as a flat amount, rather than as a rate on a base like income, spending or property value that has some relationship to the taxpayers' ability to pay. Flat taxes violate both of the commonly held principles of tax fairness."
They are imposed without regard to the level of public services received, and the poorest taxpayer pays the same amount as the richest taxpayer, Liner wrote. Historical N.C. examples, now abandoned, were taxes on acres of land owned regardless of their value and poll taxes, which were levied as the same amount per person.
"Although the amounts levied under some flat taxes might seem small, flat taxes may be quite substantial for lower-income families," he said. "Indeed, the total amount of flat taxes levied can exceed the amount those families paid in state sales taxes on food and can be substantial when compared with property taxes they pay on their homes. Moreover, the potential for these amounts to grow, and for the use of flat taxes to expand, is very great."
An example of a flat tax is an "availability" charge -- often used to pay for landfills or garbage and recycling centers -- which people pay regardless of the volume of trash they produce or whether they live in a mobile home or a million-dollar home. Others can include identical garbage collection fees, motor vehicle taxes, school impact fees for new houses, development impact fees, 911 charges and flat storm water charges, which people in one community call the "rain tax."
"Local governments are attracted to flat taxes because they bring in additional revenues without an increase in property tax rates," Liner wrote. "However, public revenue sources have to be judged not solely by how much revenue they raise and how politically expedient they are but also by how equitably they distribute the costs of providing public services among the people of the community.
"Financing services through the property tax means that people pay according to the value of the property they own, and because higher-income taxpayers tend to own more property, they pay more than lower-income taxpayers," he added. "Financing services through a flat tax on households means that taxpayers who own modest homes pay the same amount as taxpayers who own mansions."
Note: Liner, who is semi-retired, can be reached at 919-933-7685 (h) or 919-966-4199 (w). He will be out of the country from June 8-18.