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The tax-hike plan that emerged from a state House Finance Committee late Tuesday would raise $748 million in new tax revenue during North Carolina's worst modern recession. As painful as that sounds, it's the right thing to do to preserve some core state services and avoid the most damaging cuts to education and other critical programs at a time of a $4 billion budget shortfall.
But the House plan is structured in a way that will not serve the state's long-term interests well, won't bring about the kind of fairness contemplated in a Senate tax reform plan, and won't give North Carolina the kind of competitive, sustainable edge this state desperately needs.
Two good things about the House plan are that it would cover some businesses that escape paying N.C. taxes, and it would broaden the state sales tax base by covering more services. But by creating new income tax brackets and raising the state sales tax rate as well, the House plan moves away from a commitment to a broader tax base overall so that key tax rates, including personal and corporate income and sales tax rates, can be lowered.
Roland Stephen, assistant director for policy at the Institute for Emerging Issues at N.C. State University, views the House plan this way: “It's a beginning … but it is striking how the tax rates, including income and sales tax rates, are moving in the wrong direction. That won't help the state in the long run.”
The House plan, in effect, does the same things that General Assemblies have done in the past when sizeable shortfalls presented a challenge: Tinkered with a tax code that has outlived its best days, raising the sales tax rate and income tax rates to cover short-term problems.
But the problem with tinkering with a tax code written more than seven decades ago for a manufacturing economy based on tobacco, textiles and furniture is that much of that economy no longer exists. The remaining tax code is unreliable. It still brings in a lot of money when the economy is booming and people are making a lot of money, including capital gains that result in a revenue bulge. But in downturns the current tax code produces grossly inadequate revenue to meet the needs of a state that is still growing.
Cutting our way out of that jam doesn't work. Why? Because we still have to provide schools for more residents, still have to pay the state share of Medicaid, still have to provide space for a growing number of students who want to enroll in community colleges and universities, still have to house and guard prison inmates, still have to operate criminal and civil courts – the list goes on.
Because of the state tax code's volatility, insufficiency and unfairness to many taxpayers, Senate Finance Committee co-chairs have devised a revenue reform plan that broadens the tax base significantly, drops loopholes that treat some taxpayers differently than others and cuts tax rates significantly.
In an economy where North Carolina needs to be more competitive in attracting new jobs, fairer to its citizens and more consistent in paying for basic services critical to our future, the Senate plan represents the better approach for the long haul.
