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Why this tax cut is an opportunity wasted

Gov. Pat McCrory and legislative leaders should have the guts to call their tax plan what it is: A $600 million annual tax cut, not tax reform. You may like or dislike a tax cut, but don’t confuse it with the fundamental reform that North Carolina has needed for more than a decade.

House and Senate Republicans voted Tuesday for a bundle of tax cuts, totaling $2.4 billion over the next five years. McCrory called it “not just a tax cut here and there but meaningful tax reform, historic tax reform.” In fact, it is just a tax cut here and there. And there. And there. It is not historic tax reform.

The legislation properly cuts personal and corporate income tax rates. North Carolina’s are among the highest in the South and need to be cut. But by failing to couple those cuts (and others) with important reforms elsewhere in the tax code, legislators failed in at least two ways:

• They missed an opportunity for true tax reform but still called it that, making the chances of real reform down the road less likely;

• They chose not to make the changes revenue-neutral. McCrory had rightly said while campaigning that any tax changes should bring in the same amount of revenue as the current system. Instead, legislators will have to cut $600 million per year in future years from education or other areas to balance the budget.

A high-performing tax code would produce more stable tax collections through the economy’s ups and downs, while generating enough revenue to meet the demands of a growing state. For years, experts and academics from both parties have agreed that North Carolina’s code, developed 80 years ago, needed updating to align with the state’s vastly different economy. That means dramatically broadening the sales tax base to include services, reducing rates, taxing Internet purchases and closing loopholes.

The legislature’s failure to do all that prompted Republican Sen. Bob Rucho, the co-chairman of the Senate Finance Committee, to label this plan “the first itsy-bitsy step toward tax reform.”

It may be the last for a while, though. McCrory, House Speaker Thom Tillis and Senate leader Phil Berger act like tax reform is now checked off the list.

Most taxpayers would get a break under the plan, with the wealthiest getting the most relief, in dollars and percentage terms. The three personal income tax rates would all drop to a flat 5.75 percent. Standard deductions increase. The corporate tax rate drops from 6.9 percent to 5 percent and perhaps lower in future years. The estate tax would be eliminated, the gas tax would be temporarily capped.

Some loopholes were closed, but most remain untouched, both the obscure and the popular. Charitable contributions remain fully deductible, almost every nonprofit will be fully exempt from sales taxes and the franchise tax on businesses remains unchanged. The sales tax would be expanded much less than in earlier proposals.

It all adds up, eventually, to a tax cut of more than half a billion dollars per year. What legislators will cut to make up for that is anyone’s guess.

Anti-tax zealot Grover Norquist cheered the plan. But those who knew this was the best chance ever to truly modernize the state’s tax code and truly put the state on more stable economic footing will have to keep waiting, perhaps for a very long time.

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