So North Carolina has been mulling, studying, hemming and hawing about tax reform for more than a decade. But now that everyone’s on board to finally get it done, the proposals on the table are all about cutting taxes, not just reforming them. And (before you get excited) not cutting them for everyone.
Republican Gov. Pat McCrory asked for revenue-neutral tax reform in his budget, meaning a system that brings in the same amount that’s collected now. Republican Sen. Bob Rucho of Matthews told the Observer in 2011 that any tax reform should be revenue neutral.
That idea has vanished like the mid-20th century economy on which the current tax code was built. The N.C. Senate’s plan aims to cut taxes by $1 billion over three years. The House plan released this week cuts taxes by $1.2 billion over five years.
North Carolina badly needs to change its tax system. It hasn’t changed significantly since the Great Depression, and it was designed to tax an economy heavy on manufacturing, agriculture and textiles. So it’s ill-suited for an economy that today relies more on services and technology. In addition, its personal and corporate income tax rates are out of step with most of the South; lowering them would reduce the sticker-shock some companies suffer when they’re considering a move to North Carolina.
The key, then, is to modernize the tax code in a way that can still support schools, community colleges, higher education, health care, prisons, parks and other state responsibilities – the things that have made North Carolina a leader in the South for decades.
The Senate and House plans both fail this test. Remember the goal: A modern-day tax system that is fair, stable and adequate. Fair, meaning those least able to pay don’t pay a higher rate than others; stable, meaning better able to withstand economic downturns; and adequate, meaning producing enough revenue to pay for things like great public schools.
The Senate’s tax overhaul already looked wrong-headed to us, but anti-tax fanatic Grover Norquist’s blessing of it this week confirmed that.
The plan, supporters’ own calculator shows, would significantly cut taxes for the wealthy while raising them on the lower and middle class. It eliminates progressive brackets in personal income taxes in favor of a flat 4.5 percent tax (down from the current range of 6 to 7.75 percent). Most egregiously, it applies a 6.5 percent sales tax on groceries and prescription drugs. Both parties came together in the 1990s to end the sales tax on groceries; reinstating it, at this even higher rate, would dramatically hurt many thousands of families.
The House plan takes a more measured approach. It cuts tax rates across the board, but not as deeply as the Senate, and maintains the current exemption for groceries and prescriptions.
Both plans start with a solid approach: expanding the sales tax to more services while cutting rates. But some details are flawed in each, and the final plan should be, as McCrory and Rucho both once said, tax reform, not a tax cut.
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