It has been more than 20 years since an N.C. study commission predicted that if the state’s tax system were not modernized, “the General Assembly will be forced to resort time and again to ad hoc measures to increase revenues or control spending … under severe budget pressure…”
How prescient. North Carolina’s tax code has not been modernized, and the legislature has had to scramble repeatedly, knitting together temporary tax hikes and sizable spending cuts just to make the books balance.
Now, after years of talk, legislators reconvene in Raleigh today serious about updating how North Carolinians pay taxes. It’s essential they do so. The state’s tax code is antiquated, still largely based on a Depression-era foundation. North Carolina has changed a lot in those 80 years. Manufacturing and agriculture have dwindled, while the service economy has boomed and the Internet has revolutionized how people shop.
As a result, the sales tax base has steadily eroded, and the state has become overly reliant on the personal income tax. That tax is volatile, which is one reason North Carolina had some of the nation’s biggest budget shortfalls during the Great Recession.
So N.C. residents should be encouraged that the chances of tax reform have rarely been better. It’s essential, though, that the reforms address current flaws and build a tax code that’s fair, adequately funds state needs and is designed for a 21st century economy. The danger is that legislators will use “tax reform” as a disguise for across-the-board tax cuts without creating a truly sustainable system.
Strong tax reform will cut rates while broadening the base. It will not reduce state revenue totals. Despite the rhetoric, North Carolina’s state and local combined tax burden is not out of line. North Carolinians pay 9.9 percent of their income, on average, in state and local taxes, which is exactly the national average. North Carolina ranked 31st nationally in state spending per capita in 2010. It ranks 27th in state taxes collected per person.
Under any plan, the sales tax should apply to more services, allowing a cut in the rate and possibly in the personal income tax rate as well. North Carolina’s sales tax currently applies to only about 30 out of 168 services. Personal income tax rates could be lowered further by applying that tax to federal adjusted gross income rather than to federal taxable income. Legislators should also comb through and justify each one of the 318 special breaks in the tax code worth $9.2 billion a year.
There are hundreds of details to be worked out. But any tax reform will fail unless it results in a system that:
• Raises sufficient revenue to fund education, health, criminal justice and other state needs.
• Progressively distributes the tax burden. Those with the least should pay the smallest percentage of their incomes in taxes.
• Holds up better than our current tax code during economic downturns.
• Keeps North Carolina competitive in recruiting and growing business.
• Is simpler than the current one.
Honorables, we’ve had decades of talk. It’s time to get to work.