Share
RALEIGH Any way you look at it, the prospects for restructuring North Carolina's antiquated revenue system were rough enough before last week's hearing of a joint legislative committee.
After all, 2010 is an election year, when legislators are often reluctant to make decisions that might stir controversy. Any tax legislation is radioactive to some. And the 2009 legislature had just raised taxes to fill part of a deep revenue shortfall brought about by the Great Recession.
Still, members of the House and Senate Finance Committees - who collectively comprise nearly 40 percent of the legislature - have been meeting biweekly since early November in an effort to learn more about a revenue system that features a fairly high income tax rate and a growing combined rate on sales taxes (7.75 percent in most counties), but which no longer produces enough revenue to meet demands for basic services.
So far, the committee's study has concentrated on the state sales tax and how changing it might make it possible to cut the tax rate significantly.
This is not a new observation. Almost every state commission that has studied the sales tax has concluded that if the state were to broaden the sales tax base to include more services, it could also pare the rate substantially - perhaps trim other tax rates, too.
The committee heard from witnesses that North Carolina has an extremely narrow sales tax base, taxing fewer than one-fourth of the services that could be taxed, including such things as lawn services, plumbing repairs, hairdos and the like.
And it heard testimony about how the sales tax base is effectively shrinking, partly because many consumers are buying less, and those who are buying frequently buy on Internet sites that don't do an effective job of collecting sales tax on purchases from North Carolina. This state may be losing $300 million alone each year on those purchases. So what do states with shrinking sales tax revenue do? They raise the rate, as this state did last year. The result is to change the way people buy goods - and further diminish the value of the sales tax as a producer of revenue for schools, health care or public safety.
The answer, almost everyone agreed, is that the best policy is to broaden the tax base as much as possible and reduce the rate as much as possible. "That's the standard advice," notes House Finance Co-chair Jennifer Weiss, D-Wake, "yet it's not the standard operating procedure" in other states. "It's a very difficult nut to crack," she added.
What the hearings have done so far is educate members of both the House and Senate committees. The Senate has taken the lead on tax reform in the past year, and Senate leaders weren't sure the House was ready for grappling with it. Sen. Dan Clodfelter, D-Mecklenburg and Co-chair of the Senate Finance Committee, said he has found that House members of both parties "are willing to engage" the issue of tax reform. Because of that, he said, the committee has examined the sales tax in considerable depth - exploring issues of regressivity, fairness, difficulty of applying, neutrality and other practical concerns. Members from both parties are learning, he said, that "it's a marathon, not a sprint."
But they also learned that it has an aspect of gamesmanship, too. Tuesday afternoon, Republican leaders issued a list of six principles of tax reform they believe should guide any restructuring. House Republican leader Skip Stam, R-Wake, Senate Republican leader Phil Berger, R-Rockingham and Republican Joint Caucus Leader Eddie Goodall, R-Union, said in a statement that those principles are an outline for tax reform. They agreed that reducing income and sales tax rates by broadening the base "in a revenue neutral way" is "the right way to go."
But the "right way" included defining revenue neutral as the amount of money available last year before the tax increase. They want the legislature to amend the Constitution to peg state and local sales tax rates at 3 percent respectively, and adopt a statute requiring approval of tax hikes by a two-thirds margin of each chamber.
Their insistence on defining revenue neutral as the amount of money available prior to the 2009 tax hike would do several things. It would indeed rein in spending and make it easier to cut tax rates.
But it also would further starve essential services that already show excessive signs of wear, including public schools that have lost good teachers, community colleges where classrooms are overflowing and university campuses that face a rapidly increasing enrollment at a time when GOP leaders would cut state spending even more.
The Republican outline for reform made for good theater and undoubtedly a good election-year platform. But it is hard to see how it will help bring about reformation of a revenue system that essentially was devised in the Great Depression years of 1931-33 and which no longer serves the public very well.
"The goal here is not political gamesmanship," Weiss said. "It's meeting the needs of the state in a responsible way."
That's hard enough in any atmosphere. Doing it in an election year, amidst a slow economic recovery, may be impossible. Tax reform's rocky road just got rockier.
