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Skip food, and other tax reform principles

Betty Seizinger had been diagnosed with breast cancer and an ovarian cyst, and had undergone two operations in four days. Lying in her hospital bed afterward, she picked up the phone and called an Observer reporter to talk about repealing the state sales tax on food.

The tax was supposed to have been temporary when Gov. Terry Sanford pushed it in 1961 to fund higher teacher salaries. But it lingered for 35 years until Seizinger, then the president of the local League of Women Voters, made eliminating it a crusade. Her argument – that the tax was enormously regressive – made so much sense that it attracted broad bipartisan support. Robin Hayes, now the chairman of the state Republican Party, made it a key plank of his 1996 bid for governor. “Four no more,” he’d repeat endlessly, waving four fingers and referring to the 4 percent sales tax on groceries.

The legislature finally eliminated the tax. That saved N.C. families scores of millions of dollars each year.

Now state Sen. Bob Rucho, a Matthews Republican, wants to bring that tax back, and then some. Rucho’s tax reform plan would add a 4.5 percent state sales tax on food, on top of the 2 percent local governments already charge.

This is such a monumentally backwards idea that we can only assume Rucho has included it merely as a bargaining chip, with no intention of it actually becoming law.

There will, after all, be a lot of horse-trading over the next couple of weeks, as the legislature tries to settle on a compromise among three competing plans that were floated Thursday. All three cut income and sales tax rates while applying the sales tax to more services.

They differ on important details, but all three are being criticized because of the new taxes they impose. Some of these critics forget that with any reform of a system that hasn’t fundamentally changed in 80 years, everyone’s ox will have to get gored a bit.

At the same time, Rucho and others making this push should remember that tax reform is about reforming taxes, not just cutting them.

The complications in these plans are endless, but in the coming weeks, legislators should follow a few essential principles:

• The new system should bring in as much revenue as the current one. Gov. Pat McCrory has said he wants the plan to be revenue neutral, but none of the three is. Rucho’s would require spending cuts of $770 million over two years, and the House plan would require cuts of around $300 million over two years. That would hurt public schools, universities or other state responsibilities. A third plan, from Mecklenburg Sen. Dan Clodfelter and others, actually brings in more than the current system.

• The new code should not shift the tax burden from the rich to the poor. According to the N.C. Justice Center, the bottom 80 percent of N.C. households pay close to 10 percent of their incomes in state and local taxes, versus 6.5 percent for the top 1 percent of households. Protections for lower-income taxpayers need to be built into the plan, such as income tax exemptions or restoring the earned income tax credit.

• North Carolina should not tax groceries or prescription drugs. It is too onerous on low-income residents and seniors on a fixed income. According to the AARP, just 10 states tax groceries and only one taxes prescription drugs.

Two features of these plans have received little attention. First, none of the three cuts sales tax rates dramatically. If the state is to apply the sales tax to many more purchases, it should reduce the rate more than these proposals do. Second, both Rucho’s plan and the House plan cut local governments’ sales tax rates while keeping the state’s the same or even raising it. Rucho’s plan in particular would force Charlotte-Mecklenburg, for example, to cut tens of millions of dollars from its sales tax collections.

North Carolina has needed to change its tax system for years. It looks like it might finally happen. Here’s hoping legislators don’t just make things worse.

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