Plugging the Tax Leak: An Analysis of North Carolina’s Local Sales Tax Redistribution Policy

Abstract

Amid rising concerns over the urban-rural divide, taxation equity, revenue generation, and local tax leakage, several states are contemplating measures to support jurisdictions perceived as bearing the brunt of evolving economic landscapes. In 2015, North Carolina introduced a system for local sales tax revenue sharing, wherein each county contributed to a pool of local sales tax revenue, subsequently redistributed among 79 of the 100 counties. This policy aimed to address tax leakage by ensuring that half of the base local sales tax remained at the point of sale, with the other half distributed on a per capita basis. In this analysis, we evaluate the policy’s effectiveness in achieving this equilibrium and identify limitations and shortcomings.