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State Sen. Bob Rucho says North Carolina tax system needs an overhaul

More Information

  • Chart: Where N.C. taxes come from
  • What the changes would mean

    A state Senate proposal would drastically change the way North Carolinians fund state government.

    The current system

    In the 2012 fiscal year, North Carolina has state tax revenues of $18.5 billion.

    Of that, $10.27 billion came from personal income taxes and $1.1 billion from corporate income taxes. That’s 62 percent of all tax revenue.

    The state got $5.2 billion from sales and use taxes.

    The rest came from other sources.

    The Senate Republican Plan

    • Would end personal and corporate income taxes.

    • Would replace lost revenue by expanding the business license tax and the sales tax. The sales tax would expand to cover more services.

    • Could result in a combined state and local sales tax of 6 to 7 percent. Sen. Bob Rucho says a worst case rate would be 8.05 percent, if few additional services are taxed.

    The state sales tax is now 4.75 percent, though local taxes make the combined tax higher. Mecklenburg County’s combined rate of 7.25 percent likely would go down under the plan.

  • More information

    What could be taxed?

    North Carolina taxes 46 services. There are as many as 183 that could be taxed. Here are some things you could find yourself paying sales taxes on.

    • Health clubs

    • Massage services

    • Shoe repair

    • Billboard advertising

    • Radio and TV advertising

    • Newspaper and magazine advertising

    Interior design and decorating

    • Exterminating

    • Detective services

    • Pet grooming

    • Landscaping

    • Carpentry, painting and plumbing

    • Travel agent services

    • Water and natural gas

    • Insurance services

    • Real estate agents

    • Barber shops and beauty parlors

    Dating services

    • Tailoring

    • Public relations and management consulting

    • Bowling

    Memberships in private clubs

    • Car washes

    • Dentists and doctors

    • Architects

    • Lawyers

  • More information

    Source: N.C. General Assembly

RALEIGH Republican state Sen. Bob Rucho is screening his PowerPoint to yet another audience, watching slide after slide build a case for changing North Carolina tax law.

All the charts and numbers add up to one conclusion: A tax system built during the Great Depression doesn’t work in a 21st century economy.

For the former dentist from Matthews, the answer is a radical overhaul.

Rucho would replace the state’s single biggest revenue source, the income tax, with a broader sales tax and business license fee. As co-chair of the Senate Finance Committee, he’s leading the charge for the plan with the support of Senate GOP leaders.

But the idea is meeting resistance not only from advocates for the poor but from some in his own party, even those who favor tax reform.

Last week, House Speaker Thom Tillis of Cornelius said he worries about eliminating personal income taxes too quickly. Art Pope, Gov. Pat’s McCrory’s budget director and low-tax advocate, expressed “great concerns” about the Senate plan.

With Republicans holding the governorship and legislative majorities, North Carolina joins a parade of GOP-controlled states moving toward cuts or elimination of their personal and corporate income taxes.

Louisiana Gov. Bobby Jindal wants to repeal his state’s income taxes. The governors of Nebraska and Kansas have proposed similar goals. And South Carolina Gov. Nikki Haley has proposed income tax cuts.

For Rucho, cuts aren’t enough.

“There are good taxes, there are bad taxes,” he says. “A good tax is a consumption-based tax. Any time you buy a good or service you help the economy. Also, you have a choice. You can say ‘I’m not going to buy that product, I’m going to set (the money) aside.’ ”

But he says his plan is “not just about taxes.” Getting rid of income taxes, he says, would make the state more attractive to employers.

“Our goal,” he says, “is to have a competitive economy.”

Spreading the word

With missionary zeal, Rucho has shared his slides with audiences around the state.

They suggest corporate and personal income taxes are volatile, fluctuating with the economy. But they still account for a growing share of North Carolina revenue.

Meanwhile, the share comprised of sales tax revenue has steadily declined as people spend more of their income on services not subject to the sales tax, such as health club memberships or lawn care services.

At the same time, North Carolina’s job growth lags the national average while unemployment is higher. Per capita income has fallen since the late 1990s.

“This is what you need to fix, now how do you fix it?” Rucho says. “What do you base your solution on? Sound economics. You say get rid of the bad taxes. You take on a pro-growth tax like a consumption-based tax.”

Rucho says he arrived at his conclusion about six months ago, after studying the numbers with legislators and fiscal staff.

Others have pushed similar ideas.

“Making the state more competitive through tax reform is a great tool states should be using,” says Jonathan Williams, a state tax expert at the conservative American Legislative Exchange Council.

He says a study done for ALEC by economist Arthur Laffer showed that the nine states with no personal income tax – including Tennessee, Texas and Florida – had a 25 percent higher growth rate over the last decade than the national average.

Critics, however, say other studies show that a state’s prosperity has little to do with whether it has an income tax.

“In states with no income tax we don’t see appreciatively better economic performance,” says Alexandra Sirota, director of the Budget and Tax Center, a group affiliated with the liberal N.C. Justice Center. “The reality is, the promise of jobs is unlikely to materialize.”

Her group says other studies have shown little connection between income taxes and economic growth. The personal income tax, she wrote in a study last year, “is most aligned with ability to pay and grows the most with the economy.”

Hurting the poor

Critics say Rucho’s proposal would hurt low-income people.

Income taxes are progressive. Wealthier earners pay higher rates. The sales tax, on the other hand, is regressive, with the poor paying a greater share of their income on necessities.

“Poor people don’t have a choice about whether to spend money in order to live,” says Gene Nichol, director of the Center on Poverty, Work, and Opportunity at UNC Chapel Hill.

Nichol says poverty has jumped dramatically in North Carolina.

A decade ago, he says, the state’s poverty rate ranked 26th in the country; last year it was 12th. A third of North Carolinians are considered low income. Almost one in five live in poverty.

“To look at that set of facts and decide what we need to do the most is to reduce the burden on those at the top and increase the effective rate for those at the bottom is astonishing,” he says.

A report released Thursday by the Washington-based Institute on Taxation and Economic Policy found that the poorest 20 percent of North Carolinians pay 9.8 percent of their income in combined state and local taxes while the top 1 percent pays 6.5 percent of their income.

Rucho says that shows the current tax system does little to help the low-income. He argues that by boosting economic growth, his plan would lift the poor.

“This is worse for poor people than anything,” he says of the current system. “We need to try an alternative. And the alternative is to give everybody an opportunity for economic advancement.”

Conflicting solutions

Before Republicans took over the Senate in 2011, Sen. Dan Clodfelter held Rucho’s Finance Committee post. The Charlotte Democrat took his own PowerPoint around the state with many of the same slides as Rucho.

“We agree on the diagnosis of the problem,” he says.

Where they differ is on the solution.

In 2011, Clodfelter helped introduce a bill that would have broadened the sales tax base while lowering other tax rates. It’s hard to compare North Carolina to other states, he says, because state governments vary in their responsibilities. North Carolina, for instance, has one of the largest systems of state-owned and maintained roads in the country.

To him, getting rid of income taxes is impractical.

“It is not an easy task to replace half the current budget,” he says. “It just doesn’t work.”

Co-sponsoring Clodfelter’s 2011 bill was Sen. Fletcher Hartsell, a Concord Republican. He’s reluctant to abandon all income taxes.

“It’s important to have a variety of revenue sources,” he says.

He’s not convinced that eliminating income taxes is the key to economic growth.

“You could make the argument but you could also say getting rid of the sales tax would leverage growth,” he says.

Rucho says earlier efforts such as Clodfelter’s “nibbled around the edges” of tax reform.

“We’ve been too narrow-minded,” he says. “That’s why other proposals have failed.”

Rucho has tackled other big issues. Last session he was an architect of redistricting plans that helped Republicans pick up seats in Raleigh and Washington. Now he hopes to have a tax reform plan in place by May.

“You may agree, you may disagree,” he says, “but then come up with another answer.”

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