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Tax reform on GOP agenda

RALEIGH By any standard, the job facing the 2011 General Assembly is as difficult as any in the last 35 years. Lawmakers must plug a huge budget shortfall, cut billions at a time when unemployment hovers just under 10 percent, fairly reshape legislative and congressional districts that meet state constitutional and federal Voting Rights Act parameters and deal with dozens of controversial issues that members of the new Republican majority have been itching to take on for years.

The list includes health care, municipal annexation, regulatory reform, environmental regulations and more. If there's something Democrats passed during the century-plus they dominated the legislature, it seems there's a Republican contemplating repealing, revamping or reinforcing it.

And there's something else: Tax reform.

Democrats have been trying for more than a decade to come up with a successful formula for reforming a state tax structure that essentially was created during the Great Depression and fine-tuned for decades since. It was structured upon the foundation of the state's manufacturing economy - principally tobacco, textiles and furniture. But with hundreds of thousands of old-economy jobs now gone, the state's revenue system is largely out of sync with a new economy based on services, high tech research and production and an evolving agribusiness sector, yet hamstrung by lingering unemployment.

And while Democrats made a number of small changes that nibbled around the edges of tax reform, they were unable to overcome widespread resistance to one key recommendation common to virtually every study of the state's tax structure over the past two decades: To truly reform the system, lawmakers must significantly broaden the tax so that they can also cut tax rates.

The benefit should be obvious: lower taxes based on taxing more goods and services. But the resistance is obvious, too: Spreading a tax to a previously untaxed product or service looks like a tax increase. And while tax rates would go down, some will be paying taxes on something previously untaxed. That was a problem for Democrats and it surely will be a problem for Republicans when they get to the topic.

I spoke last week with two legislators who will be intimately involved with tax reform: House Speaker Thom Tillis and Senate Finance Committee co-chairman Bob Rucho, both Republicans from Mecklenburg.

It won't happen fast. "It's going to take us a while to work up a plan," notes Rucho. He is not only co-chair of the tax-writing committee but also chairman of the Senate Redistricting Committee. Fixing the budget is No. 1 on his list, and getting redistricting right is No. 2. But tax reform must happen.

Rucho adds, "We do not consider tax policy our priority at this time, but it is essential to growing the economy."

Tillis, a successful business consultant before entering politics, concedes the difficulties of remaking a 70-year-old tax system. But it is not as if the legislature is starting entirely from scratch, he adds. Sen. Dan Clodfelter, D-Mecklenburg, "did a lot of good work" studying the existing system and developing ideas for change in previous legislative sessions. And, Tillis said, "more Republicans than Democrats were for it (tax reform)" - which may surprise a cadre of Democrats who pushed unsuccessfully in the past for tax reform.

If Tillis is right about Republican interest, tax reform has a fair shot at success this legislative session, though it seems unlikely to happen in this first year of the biennial legislature. It could be 2012, or later.

One reason is that it's not enough just to understand how to restructure a tax system, Tillis said, "but also how it affects the process of administering ... and collecting" revenue based on the new system.

Rucho compares the complexity of the state system to an onion: "We've got to peel the layers back to get to the core of what we do. We need to know what we are doing with the stuff and avoid unintended consequences."

Rucho's views on tax policy have changed to some degree as he has studied the system. For instance, he now believes a streamlined sales tax agreement that would collect state sales taxes from online operations outside the state is based on sound policy. He's not interested in this state getting more revenue, he says. He's interested in it as a fairness issue that helps preserve North Carolina's "bricks and mortar businesses" such as retail stores that are at a competitive disadvantage with online sellers that don't charge sales taxes.

Tax reform, he and Tillis agree, must be accompanied by regulatory reforms that remove unneeded restraints on business. Tillis says the legislature will adopt medical malpractice and tort reforms, too.

The key, says Rucho, is following three principles: Tax reform must produce revenue neutrality, allowing government spending to grow based on growth of the economy.

Tax reform must apply across the board, so government doesn't pick winners and losers.

And it must produce significant reductions in tax rates.

Tax reform won't be easy, but Tillis rejects the notion that broadening the tax base presents special problems. He believes North Carolinians understand that "when you put something in front of them that will put more money in their pockets," they'll support the idea.

He makes it sound simple. It hasn't been yet. But tax reform is essential to our future. Maybe Republicans can do what Democrats could not. We'll see.

Jack Betts is an Observer associate editor based in Raleigh: jbetts@charlotteobserver.com.
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