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RALEIGH Just a wild guess here, but Gov. Bev Perdue probably would have preferred crawling over a bed of hot coals than proposing a huge but “temporary” increase in the state sales tax last week.
It can't be much fun trying to come up with at least $1.1 billion – and maybe as much as $1.6 billion – to paper over an out-of-balance state budget and protect education and other essential state services.
But she appears determined to push the General Assembly to raise more revenue than either the House or the Senate contemplated when they passed their versions of the 2009-10 budget. Each chamber included a significant amount of federal recovery money in their calculations, but with N.C. unemployment rising, lawmakers are worried about the current fiscal year and apprehensive about what happens the following year.
So is Perdue, who a few weeks ago said she didn't care which tax proposal the legislature adopted as long as the budget met core services in schools, health care and public safety.
Going for the gold
Last week she had a different message – one that grabbed headlines in ways she surely didn't like. With her suggestion for a one-cent increase in the state sales tax for 13 months beginning Sept. 1 and ending Sept. 30, 2010, she went for the big money. If approved, her “temporary” tax would bring in $843.3 million, the single largest revenue producer in her list of 37 budget options (for an online list, go to www.tinyurl.com/noegvr).
The proposal got an immediate and unflattering comparison to another “temporary” tax – proposed by her predecessor Mike Easley when he faced his own budget crisis. It took years before the legislature repealed most of those taxes, and a small part remains on the books. That's why many citizens are skeptical with any talk about a temporary tax – even one Perdue says they should believe in “Because I'm the governor.”
With Easley's reputation in tatters and Perdue's popularity taking a beating in opinion polls, it would be hard to find widespread support for such a tax.
That doesn't mean it won't pass. She proposed it in part, says Perdue adviser Mac McCorkle, because other tax plans, including a tax reform plan developed in the Senate, won't raise enough in its first year to meet all the needs Perdue wants to cover.
The Senate plan, put together by Finance Committee Co-chairs Dan Clodfelter, David Hoyle and Clark Jenkins, all Democrats, would restructure the state tax system by broadening its base and reducing rates. The state would tax more services in its sales tax base, but lower the rate – as well as lower personal income tax rates. There's a lot more to it than that, of course.
An unstable system
In the long run the Senate plan is designed to meet the goals of sufficiency and simplicity, and be less volatile during times of economic uncertainty. “What the economic crisis has done is expose how unstable our revenue system is,” notes Clodfelter.
But Perdue developed her revenue options because the budget gap is too great to bridge just by cutting programs and raising taxes a few hundred million dollars, McCorkle said.
Perdue says her plan would not only protect core services, but also be fair to working families, modernize the tax code with permanent rate reductions, and provide targeted tax relief.
Yes, it would. But it couldn't do all those things at once. For instance, the current income tax brackets of 6, 7 and 7.75 percent would drop to 5.5, 6.75 and 7.5 percent, but a new emergency surcharge would apply to incomes of more than $500,000 for singles and $1 million for couples.
It wouldn't reduce the corporate tax rate until 2011, when it would drop from 6.9 percent to 5.9 percent. And while it would broaden the sales tax base by applying to warranties, repairs, movies, luxury services and some personal services, it would raise the state portion of the sales tax, currently 4.5 percent, by 22.2 percent to 5.5 cents for a little more than a year.
Now, that's just a penny on a dollar. It doesn't add up to much when you're spending a couple of bucks. But when you're thinking of buying a larger item, it makes a difference. Over the course of a year it'll have a regressive impact on lower income taxpayers. Perdue would help some of those taxpayers by expanding the earned income tax credit, but that wouldn't take effect until early next year.
A hard sell in a tough year
This is a hard sell, complicated by the fact that Perdue, for all her experience as a legislator and lieutenant governor, is a new governor in the most challenging legislative year since the Great Depression.
We've had doomsday crises and billion-dollar-plus shortfalls before, including 1991 when Dan Blue, now a senator, was speaker of the House. That year, legislators raised taxes $600 million, cut spending $600 million and got out of town as fast as they could.
This year legislative negotiations are dragging on and on. There's no real prospect of quick agreement and fast adjournment, though budget negotiators are staying in town to work on a deal.
It'll be fascinating to see if they're interested in another temporary tax, given all the grief they've caught over Easley's temporary taxes over the years. I don't know anybody who likes it. But for lawmakers looking for a big pot of money, it would be a fast way to fix a fat problem.
Jack Betts is an associate editor based in Raleigh: jbetts@charlotteobserver.com
