Talk of N.C. Tax Reform Is Taking On an Ominous Tone
You don't have to listen to the political debate in North Carolina this election year for long to hear candidates in both parties talking about tax reform. Virtually no one disagrees that the state's tax code needs an overhaul.
It was designed early in last century when the economy was based almost entirely on manufacturing and agriculture and sales of goods. Now the state's economy is driven by technology and the purchase of services, many of which are not taxed.
That the tax code is no longer aligned with the state's economic activity is not a revelation to anybody. Political leaders have been talking about tax reform for more than a decade and appointed a variety of bipartisan blue-ribbon panels to come up with a way to modernize the tax code.
Most of them have generally agreed that broadening the sales tax base to include services must be part of any plan to update the system. That would allow a lower overall sales tax rate while bringing in more revenue and making the state less vulnerable to wild swings in collections during economic downturns.
That consensus among blue-ribbon panels led to well-received reports that garnered a lot of initial favorable publicity and then a lot of dust on the library shelves in the Legislative Building in Raleigh.
Virtually every service that is currently not taxed has its own lobbying group, many of them powerful players in the legislative process. That's prompted some politicians to say a complete overhaul of the tax system is unrealistic, and it needs to be modified a piece at a time
But lawmakers in both parties, many of whom have said publicly they agree with the need for comprehensive reform, have supported legislation that moves in the opposition direction by creating new loopholes and exemptions that make the tax code even more ridiculous.
That brings us to the current talk about tax reform, which has taken on a new, more radical tone. It's no longer about modernizing the tax code by broadening the base and lowering the rates; it's about changing who pays taxes and how much revenue the state needs.
It's taken as almost an article of faith now that the state's corporate income is too high, whatever that means, and puts state officials at a disadvantage when recruiting companies to North Carolina.
Former Charlotte Mayor Pat McCrory makes that pitch frequently, vowing to cut the corporate tax if he is the next governor. Interestingly, McCrory bristled recently when a reporter for The News & Record of Greensboro asked him if he knew what the state's corporate tax rate was, since he was promising to lower it.
McCrory apparently didn't know that the rate is 6.9 percent, though his campaign later faxed the tax rates to the reporter who asked the question. McCrory's vow to lower a tax rate that he can't name is the perfect metaphor for the nature of the current debate about tax reform.
Politicians are making promises based on ideology and talking points, not an understanding of the state's revenue system and why it needs to be fair, stable and adequate to meet the state's needs.
By the way, very few large corporations in the state pay 6.9 percent. Studies show many large companies don't even pay half of that, but economic development officials claim that the rate is so far out of whack with other states that it hurts job recruitment nonetheless.
It's often described as a sore thumb. That's another myth in the current season of distortions. Twenty-seven states have a top corporate income tax rate higher than North Carolina. That's a lot of sore thumbs out there.
Even more ominous than candidates unaware of the rates they want to reduce or the claims about corporate taxes is a growing chorus on the right to abolish all income taxes, personal and corporate, and to rely on a much higher and refashioned version of the sales tax.
That would mean a more regressive tax system and a far less adequate one too, unless the new sales tax is significantly higher than what North Carolinians currently pay. But that's an idea gaining steam on the right and finding a willing audience among the politicians who look to the anti-government crowd for policy initiatives.
North Carolina needed tax reform a decade ago. If it had happened then, the recent recession would have been tempered a bit as state revenue would not have dropped as precipitously.
And the state still needs tax reform now. But it must be reform based a commitment to a broad system of income and sales taxes that does not include special exemptions for the well-connected. It must be closely tied to the state's economic activity to provide some stability for revenue.
It must be fair and end the current practice of requiring the folks at the bottom of the economic ladder to pay a higher percentage of their income in state taxes than the wealthy.
And it must raise adequate revenue to pay for essential services of state government, public schools, higher education, human services for people who need them, environmental protections, etc.
The objective of tax reform must be tax reform and not simply a veiled attempt to massively reduce state revenue and hamstring public services, and hurt the people who need them.
That would require putting ideology aside and coming with a balanced plan for the state's future.
It's hard to imagine that given the state of what passes for a policy debate these days, but a guy can dream.
Chris Fitzsimon is executive director of N.C. Policy Watch. Contact him at chris@ncpolicy watch.com.
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