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Don’t burden middle-, low-income in tax plan

By Fannie Flono

It wasn’t mere coincidence that a day before N.C. Senate leader Republican Phil Berger unveiled a plan to overhaul the state’s tax system that Nebraska’s GOP Gov. Dave Heineman was giving his State of the State address focusing on the same thing.

And it’s not just happenstance that the centerpiece of both plans is eliminating corporate and personal income taxes.

North Carolina and Nebraska are joining a slew of states with Republican-controlled legislatures or GOP governors – we’ve got both in the Tar Heel State – that are grabbing the opportunity to push the idea of tax reform through redistributing the tax burden from those with higher incomes to those with middle and lower incomes. The idea of replacing taxes based on income and from corporations with increased sales taxes that disproportionately affect those with lower incomes has been championed by the American Legislative Exchange Council.

A conservative agenda

You might not have heard of ALEC but you’ve seen its footprint on legislative actions. Nationwide, it has powered through a conservative agenda in state legislatures with voter ID, school voucher, tax reform and other bills. And one of the prime movers behind ALEC’s tax reform ideas is Grover Norquist. Yes, the Grover Norquist who holds such unseemly sway over some members of Congress who would push the country into financial calamity to stay true to a no-tax pledge to him.

ALEC touts the elimination of corporate and personal income taxes as a pro-growth move for states. In its “Rich States, Poor States: From 1999 to 2009” paper, it analyzes the nine states with no personal income tax and concluded that there was much higher job growth in those states. The states analyzed were Alaska, Florida, Nevada, South Dakota, Texas, Washington and Wyoming, all of which don’t levy personal income taxes. Also included were New Hampshire and Tennessee, which only tax interest and dividend income.

The ALEC statistics have become the mantra of this push by conservatives – Louisiana Gov. Bobby Jindal joined the chorus last week, calling for an end to that state’s income tax and corporate taxes and replacing them with higher sales taxes.

But tax experts are already looking askance at the data and the assessment. They note that both New Hampshire and Tennessee actually lost jobs during the study’s time period, despite having no personal income tax. Some states with high personal income taxes gained jobs. They also noted that explaining job growth with just one factor doesn’t make a lot of sense. Other factors can and do contribute, including natural resources, population, weather and specialized industries.

Take Alaska, Wyoming and Texas. All three rely heavily on their booming oil and gas resources. Even if – or when – fracking is allowed, such natural resources won’t be a big boon in North Carolina. Experts agree there’s not that much of it.

Nevada and Florida of course benefit from some unique industries – gambling and tourism – neither of which North Carolina has in abundance. Lawmakers have even turned their noses up at gambling, as evidenced by the push to outlaw sweepstakes games, which state courts recently affirmed are illegal in the state.

The tax reform N.C. Republicans floated Wednesday included elimination of both corporate as well as personal income taxes. We would join an even smaller fraternity of states with both, though this year a number of other states with GOP legislative or executive control are following that drumbeat with proposals. But so far only Nevada, South Dakota and Wyoming have no corporate income taxes. Washington state also has no corporate income tax, but persons doing business in the state are subject to a business and occupation and/or public utility tax. Texas doesn’t have a corporate income tax but does have a franchise tax based on sales.

Quadrupling grocery tax

GOP lawmakers in North Carolina said they’re offering a “concept,” not a plan. But analyses of even that “concept,” which includes a shameful quadrupling of the 2 percent grocery tax now levied only by local governments, should give pause. The N.C. Budget Center did a simulation analysis that suggested more than half of N.C. taxpayers, particularly the middle and lower class, would see their overall tax burden rise while the most wealthy would get a significant tax cut. Analyst Alexandra Sirota said that “eliminations of the personal and corporate income tax would be devastating for North Carolina because it would eliminate key revenue sources and again shift the load to a majority while some get a tax break.”

Republican legislative leaders such as state Sen. Bob Rucho of Mecklenburg don’t really deny that.

But Rucho says corporations would pass on their savings to consumers if they paid lower taxes. He says they would also add more jobs, though he admits there’s no guarantee of that. So, that’s the plan – depend on the largesse of businesses whose imperative is higher profits for themselves and their stockholders if they have any?

To sell this concept, proponents will argue – as some in other states already have – that the personal income tax structure is too volatile and is the prime reason that some states including North Carolina were so hard hit during the recession. But as the Washington-based Institute on Taxation and Economic Policy points out, all major taxes states use are affected by short-term revenue volatility – the income tax no more than any of the others. And officials assert that long-term, progressive taxes like income taxes are the most reliable revenue source, “displaying more robust growth in the long run than sales, property or excise taxes.” Replacing income taxes with higher sales taxes also presents a real danger to providing adequate sustainable funding for public investments, institute officials say studies show. Tennessee might already be showing some strains with the nation’s highest violent crime rate in 2011.

I am a proponent of modernizing the state’s tax system. It has needed change for decades. There are some welcome reforms being offered in the concept unveiled Wednesday, including a thoughtful elimination of a multitude of tax breaks for special interest groups.

It is time for an overhaul. But N.C. lawmakers should offer one that’s fair, efficient and effective. It must not heap the tax burden on middle and lower income people.

E-mail: fflono@charlotteobserver.com.
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