RALEIGH To lower the states income taxes, top legislative leaders are considering a plan to levy a sales tax on roughly 130 types of businesses that offer tax-free services everything from haircuts and insurance to pool cleaning and arcade games.
Republicans made an overhaul of the states tax system a top issue this legislative session, but the dialogue remains behind closed doors as the House and Senate work to craft a consensus plan before introducing legislation. The secrecy is a point of objection among the Democrats in the minority.
So far, much of the attention is focused on Senate leaders goal to eliminate all income taxes and less on how to pay for the cuts even though the repercussions from the a sales tax on services is sweeping.
North Carolina lawmakers are considering putting a sales tax on any service that is taxed in at least one other state. The list of nearly 170 types of services is based on a 2007 survey from the Federation of Tax Administrators, an industry professional group.
It includes car washes, landscaping, water, debt counseling, dating services, taxidermy, newspapers, bowling alleys, most labor costs, pet grooming, investment counseling, and professional services offered by attorneys, accountants, veterinarians and physicians.
A recent study estimated the broader tax on services would collect about $2.1 billion in additional revenue for the state at the current rate, a small part of what is needed to offset the approximately $12 billion generated by the corporate and personal income taxes. Lawmakers are also considering increase the sales tax, so that number could increase.
North Carolina currently taxes about 40 services. According to the survey, it taxes fewer services than all but 18 states. But not all are taxed at the current 4.75 percent state sales tax rate.
Only two states Hawaii and New Mexico tax most of the services tracked by the group, while only seven states tax professional services.
A handful of services on the list are taxed in a few states and seem outmoded for North Carolina, such as tickertape financial reporting and seismograph services.
Republican lawmakers acknowledge that a services sales tax may increase what consumers pay, but they argue that income tax cuts being considered will soften the blow to their wallets and create a system that is more sustainable and fair.
Sen. Bob Rucho, a Matthews Republican leading the tax overhaul efforts, said revamping the system is necessary because household consumption has changed, eroding the base of the states tax system. Two-thirds of household purchases are services and one-third are taxed tangible goods, the opposite of a generation ago, he said.
The share composed 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.
We are competing in a 2013 global economy, and our tax policy is from the 1930s, he said. Thats like trying to drive on a super highway in a Model T.
Rucho, co-chairman of the Senate Finance Committee, said he favors taxing all services on the list. It should be a balanced approach because there is more and more of a shift toward the service industry in North Carolina and its just a matter of fairness that everybody should be treated the same, he said.
Rucho has shared slides around the state that suggest corporate and personal income taxes are volatile, fluctuating with the economy. But they still account for a growing share of North Carolina revenue.
At the same time, North Carolinas job growth lags the national average while unemployment is higher. Per-capita income has fallen since the late 1990s.
Rep. David Lewis, a Republican leading the effort in the House, said he expects his colleagues to debut their own outline for a tax overhaul before the end of the month amplifying the negotiation efforts with Senate leaders, who put forth a conceptual plan earlier this year.
We are looking at broadening the base and trying to figure out what will spur additional economic growth and employment in the state, he said.
From the sidelines, Democrats argue the Republicans initial ideas would shift the tax burden disproportionately and hurt lower-income taxpayers, who spend a larger share of their money on services.
Its unfair to the majority of people if income taxes are lowered and sales taxes go up, said Rep. Paul Luebke, a Durham Democrat. The wealthy will disproportionally benefit from the decrease. Observer staff writer Jim Morrill contributed.
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