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Carolina Beat

Tax Reform The Key To Economic Vitality

Jan. 31st, 2013
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As the new General Assembly gets under way, there are lots of issues to be considered. Repaying the unemployment insurance debt owed to the federal government, requiring photo identification to vote, restructuring the state's information technology systems, rejecting the health exchanges and Medicaid expansion under Obamacare, repealing costly energy renewable portfolio standards, and reducing regulations on businesses are on the table.

But the leadership and our new governor have made clear that their top priorities are boosting the economy and pushing new private-sector employment. Tax reform offers the best way to accomplish these things.

North Carolina's tax system was set up in the 1930s based on an economy driven by manufacturing and agriculture. It needs a complete revamp. Study committees, lawmakers, economists, and others have talked about reform for 20 years. Instead of making real changes, we've ended up with an even more convoluted, complicated system and less transparency than we had to start with.

Despite good intentions, tax reform has not happened because it's hard and it's complicated. I suspect we'll have lots of ideas on the table and intense debate. In the end, we need a plan that eliminates the current tax bias against saving and investment and gets the economy moving, businesses growing, and people working.

The Senate's proposal would rely on expanding the sales tax -- raising the base rate to 8.05 percent -- while eliminating corporate, franchise, and income taxes. Concerns about the plan include a new business tax that would generate twice the revenue derived from the corporate and franchise tax; a tax increase on real estate transactions; and asking more businesses (mainly service providers) to collect taxes that have never done so. The plan would not limit additional rate hikes, leaving the door open for "temporary" and unlimited incremental increases, giving big spenders free rein if they regained control of state government.

A proposal by the John Locke Foundation would eliminate corporate, estate, and state sales taxes altogether. It's based on a consumption tax called the Unlimited Savings Allowance tax that would be collected using the current income tax structure.

Taxpayers would use the adjusted gross income they report to the IRS, include a standard deduction, and deduct all charitable giving and savings. On that remaining amount -- your consumption -- you'd pay a flat rate of 8.5 percent. This would operate much like an IRA, allowing income to accumulate, and taxing it only once, when it is spent. A study shows this plan should boost the state's economy by $11.6 billion and create 80,000 new jobs in the first year it was in place and thousands more each following year.

Participating financial institutions could set up Carolina USA accounts (again, like IRAs) to ensure accurate reporting and accountability. The plan eliminates the tax discrepancy between Internet sales and brick-and-mortar stores. It puts the government, rather than businesses, in charge of collecting taxes. It introduces no new taxes or fees, picks no fights with special interests, is easy to understand and administer, and elegant. Article V, Section 2 (6) of the N.C. Constitution says, "The rate of tax on incomes shall not in any case exceed 10 percent," thereby capping the rate should big spenders retake control.

If incremental reform is more feasible politically, a modified USA plan should be considered. Adopting a 6 percent USA consumed-income tax while cutting the state's retail sales tax rate to 4.5 percent would be a move forward, creating (according to the study) 10,000 jobs and $4 billion in economic impact.

Comprehensive tax reform should result in a system that is simple, transparent, fair, provides stable revenue for core functions of government, and, most importantly, encourages economic growth and job creation. The Senate has done a good job of starting the debate on real tax reform. There are other ideas to consider, too. It's a challenging job, but substantive, thoughtful tax reform is doable. Let's get started.

Becki Gray is vice president for outreach at the John Locke Foundation.