A Little Tax Fairness Goes a Long Way
Most of the budget discussion in Raleigh during this short session has understandably focused on where cuts can be made to address an $800 million shortfall that may rise to $1.3 billion if expected federal Medicaid money doesn’t come through, an increasingly likely scenario.
There hasn’t been nearly as much scrutiny on the revenue side of the state budget picture. New taxes were taken off the table by legislative leaders before the session began. It is an election year after all and lawmakers did raise a billion dollars in taxes last session with a temporary increase in the sales tax that will expire at the end of the next year.
That’s the same time that the bulk of the federal stimulus money will no longer be available, setting the stage for a $2.5 billion budget hole that will be impossible to fill without new taxes or more devastating cuts on top of the ones already made.
That’s prompted Republicans to demand more damaging cuts this year, to get ready for next year’s problem, though their demands haven’t come with any specifics, just overheated rhetoric designed to make a few political points without having to take the heat for the deep reductions their approach would require.
But neither Democrats nor Republicans have been willing to seriously consider common sense revenue reform that’s not a tax increase at all and is nowhere near as complicated as the overhaul of the state’s outdated tax structure they keep studying and studying and studying.
Many multi-state corporations who operate in North Carolina don’t pay any state taxes. They simply move their profits around among subsidiaries to avoid them. More than half the states in the country have already closed this loophole.
The solution is a change in tax law called combined reporting that would treat the parent company and most subsidiaries as one corporation for state income tax purposes.
All the profits are combined and the state then taxes a share of that combined income based on a formula that takes into account the corporation’s activity in the state as compared to its activity in other states.
In other words, companies are required to pay the state taxes they owe on profits they make in the state. More than 20 states already have a combined reporting law.
Closing the loophole in North Carolina would raise tens of millions of dollars now, even in the struggling economy, and much more when things turn around. And it’s not a tax increase. It is simply asking corporations to pay their share of state taxes.
Not only have lawmakers refused to consider combined reporting this session, the Senate budget includes a provision that would waive the Department of Revenue’s authority to levy a 25 percent penalty when corporations have not paid their taxes under current law.
That would also cost the state millions of dollars the same time lawmakers are struggling to keep teachers in public school classrooms and maintain mental health services.
Let’s hope budget writers come to their senses and rethink that idea. And while they are at it, how about finally making huge corporations pay the same taxes as everybody else?
A little tax fairness never hurt anybody. And this year it could save jobs and help protect the most vulnerable people in the state.
Chris Fitzsimon is executive director of N.C. Policy Watch. Contact him at firstname.lastname@example.org.
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