Tax reform is headed to the back burner again in North Carolina, despite new management at the General Assembly.
Corporate chiefs, social advocates and politicians on both sides of the political aisle have argued for a generation the state’s tax system is outdated because it reflects a manufacturing economy of textiles, tobacco and furniture. They’ve pleaded with the Legislature and governors to retool the tax code, tax more services like automobile repairs or legal work and reduce tax rates that are among the highest in the Southeast.
“This is an issue that has been up and down the flag pole,” said retired Wachovia Corp. chief executive John Medlin, a reform proponent and a Republican. “It’s something which needs to be done, but it never is quite the right time to do.”
It appears 2011 won’t be the right time, either.
Democrats fell short with a reform package in 2009 that Republicans called a tax increase in disguise. Now the GOP is in control of both chambers of the Legislature for the first time in more than a century, starting in January. Their leaders don’t dismiss the reform concept, but won’t tackle the politically sensitive issue for now.
Their top priorities are cutting unnecessary state spending and getting the economy back on track. While they’ve vowed to let a pair of temporary tax increases expire and want to reduce some tax rates, they’re don’t want to touch broader issues of balancing the tax code until the economy roars again and other campaign platform items are addressed.
“I’m not sure reforming the tax system is something that is appropriate at this time, simply because of the unsettled state of the economy,” said Sen. Phil Berger, R-Rockingham, who is expected to be elected Senate president pro tempore in January. “The people of North Carolina elected us, I believe, to get the state’s fiscal house in order.”
Since 2000, tax reform has been discussed by at least two legislative committees, an executive branch task force and even a special statewide conference. Tax experts have shown lawmakers graphs and tables showing the state is getting an ever decreasing percentage of its revenues from corporate income taxes and sales taxes because of exemptions, credits and a narrower base to tax.
It’s meant ever larger swings in revenues from recession to boom, leaving budget-writers with year-to-year uncertainty about what to expect to pay for permanent state expenses.
At a 2006 commission meeting, economists argued inaction would lead to legislators moving tax rates even higher and raiding trust funds.
That’s exactly what happened in 2009, during North Carolina’s worst year-to-year revenue decline since at least 1970.
Democratic Gov. Beverly Perdue took hundreds of millions of dollars from pots of money throughout state government to narrow a $3.2 billion shortfall. She and the Democratic-led Legislature also agreed to temporary sales and income tax increases to help close another budget gap.
Proponents of an overhaul want to lower the sales tax rate, currently 7.75 or 8 percent in most counties, the 6.9 percent corporate income tax rate, and the 7.75 percent income tax rate for the highest wage earners.
To make up lost revenue, lawmakers would close what’s labeled by some as corporate tax loopholes, adjust what is considered taxable individual income, and subject more services to the sales tax to tap into more long-term revenues. They could expand the sales tax, for example, to cover haircuts and building repairs, since it already captures retail sales for scissors, electric razors and building supplies.
“Tax reform is not the solution to this year’s budget gap. Tax reform will help avoid this kind of problem in the years to come,” said Roland Stephen, an assistant director at the Institute for Emerging Issues at North Carolina State University, which has worked since 2005 to try to build support for the reform. “It makes our system fairer.”
Senate Democrats rolled out a tax reform plan in 2009 that worried industries that would have to pay more taxes. House Democrats and Gov. Beverly Perdue also weren’t comfortable with the package and suggested waiting another year or two until the economy improved. Perdue, who would be asked to sign any reform plan, hasn’t staked out a strong position on pushing the idea in 2011.
Lawmakers held more meetings on the tax system over the next several months, and more people are now comfortable with the reform idea, said Rep. Paul Luebke, D-Durham, senior co-chairman of the House Finance Committee for the past two years.
“The tax modernization needs to happen whether Republicans or Democrats are in charge,” Luebke said.
A tight fiscal picture means very little room for error, according to some Republicans. Incoming House Majority Leader Paul Stam, R-Wake, said tax reform isn’t good to tackle right now because voters wouldn’t believe their plan is revenue neutral — meaning tax collections wouldn’t be higher overall compared to the year before.
“It’d be very difficult while we’re in a recession to do it right,” Stam said.
Scott Huffmon, a political science professor at Winthrop University in South Carolina, remembers hearing Democratic Gov. Jim Hunt talk about tax reform in the mid-1980s while growing up in North Carolina. In 2011 and beyond, Huffmon said, the influence of the tea party movement will make it difficult for Republicans to tackle the issue.
“Comprehensive tax reform will be very, very difficult to achieve, especially when many people came in (elected) saying, `we’ve been taxed enough all ready,'” he said.
By GARY D. ROBERTSON
RALEIGH, N.C.
11/26/2010
