Pat McCrory hasn’t been shy about talking tax reform in North Carolina. It topped the issues he campaigned about in the months before he was elected governor, and he has said often since that overhauling our tax code is critical to our state. He’s right.
But in a news conference Wednesday unveiling his proposed state budget, McCrory offered only some baseline tax principles – no increases in income or sales taxes – and his budget offered only a paragraph declaring the governor’s support for revenue-neutral tax reform. It was a missed opportunity to voice specific guidelines for reform, and it signals that for now at least, the governor is deferring to Republican legislators on the issue.
Lawmakers, meanwhile, have been quietly crafting legislation that will likely reduce or eliminate personal and corporate income taxes while increasing sales taxes. A (Raleigh) News & Observer report Wednesday said top legislative leaders are considering levying a sales tax on about 130 types of businesses that offer tax-free services such as haircuts, landscaping, accounting and veterinary medicine. McCrory didn’t address the apparent conflict with his call for no tax increases.
We’ve long been advocates in this space for broadening the tax base with increased sales taxes for services. Doing so acknowledges that North Carolina has transitioned from manufacturing and agriculture to a booming service economy, and it provides a revenue stream that’s less volatile than relying on income taxes. As North Carolina learned again during the recent recession, that volatility can lead to severe budget shortfalls in bad times.
But increasing sales taxes on services comes with danger. Such taxes are regressive, disproportionately affecting people who struggle with smaller paychecks. Without mechanisms in place to protect low-income households, regressive taxes can be devastating.
A study from Katherine Newman of Johns Hopkins University found alarming trends in states with regressive tax systems, most of them in the South and West. Newman, who analyzed the combined tax burden for 49 states between 1992 and 2009, found these states had far higher rates of strokes, heart disease and infant mortality. The reason: As the poor are taxed more heavily, they have less money to buy medication and make doctor visits, and they shift to cheaper, unhealthier food. Ultimately, many also need more federal assistance, such as Medicaid. So all of us end up paying.
How can North Carolina avoid this, while still broadening the tax base? Issue tax rebates to low-income households, or exempt services that disproportionately impact low-income households. Republicans, however, haven’t seemed inclined to take those measures, instead ratifying a bill that repeals the state earned income tax credit for low-wage earners. McCrory signed it earlier this month.
Will the governor take a similar approach with tax reform? We’re not sure. The only tax specific his budget highlighted Wednesday was a repeal of the state’s estate tax, which affects affluent households. McCrory did speak of “tough choices” several times during Wednesday’s news conference, but he didn’t elaborate on who might bear the brunt of those difficulties. On taxes, at least, we hope he doesn’t leave it completely up to his fellow Republicans.