RALEIGH — Sounding a bit like a kid in a candy store, the chairman of Gov. Mike Easley’s Commission to Modernize State Finances told members of a joint meeting of the NC House and Senate finance committees last week that an array of new taxes was needed to sweeten the state’s bitter budget outlook.

Thomas Ross, executive director of the Z. Smith Reynolds Foundation in Winston-Salem, detailed the commission’s plan, which, among other measures, would expand the sales tax to include additional services and “ensure that the state’s revenue system was more stable, fair, and sufficient over the long term.” By doing so, the plan would tap North Carolina’s “new economy,” which has grown more reliant on services and less on manufacturing and agriculture since the 1980s, Ross said.

The report comes in the wake of two successive years of substantial revenue shortfalls. General Fund revenues fell short of projections by almost $500 million in fiscal 2000-01 and $1.55 billion in 2001-02. “This instability provides one reason for the need for reform,” Ross said.

In a major transfer of responsibilities, the commission recommended that Medicaid program costs be shifted from counties to the state. “Because counties have no policy authority over Medicaid and many do not have the tax base to continue to fund a substantial share of this rapidly growing program, the state should pay all of the nonfederal costs of the program, as do over 40 other states,” the report said.

“North Carolina needs a finance system that reflects the new realities of the new century,” Ross said. The state can no longer depend on tax policies that were instituted in the 1920s and 1930s, the report said, because the expectations of government have changed over time.

Chief among the new demands on government are Medicaid, increased subsidies of college education, and environment and urban-growth management. Focused strictly on increasing revenue, the commission made no mention of curtailing state spending, which soared in the 1990s. A parallel commission, also appointed by Easley, looked at spending-side recommendations but did not quantify potential savings.

To fund these ever-growing programs, the tax commission also recommended:

• Eliminate the differential rates of taxation of goods and services and remove caps on the sales and use taxes;

• Adjust sales tax exemptions, such as the recently passed local-option sales tax not applying to food while the rest of the local sales tax does, to conform with the Streamlined Sales Tax Agreement approved by North Carolina and 34 other states;

• Adopt other changes required to fully comply with the Streamlined Sales Tax Agreement, which, if approved by Congress, would allow states to collect sales taxes on Internet and catalog sales;

• Change the state income tax to tie it more closely to the federal tax code and to adopt strategies to help low-income taxpayers;

• Stabilize revenue from corporations by broadening the base on business taxes and lowering the state’s corporate income and franchise taxes.

Members of the commission are: Rep. Gordon Allen, D-Roxboro; Sen. Daniel Clodfelter, D-Charlotte; Rep. Wilma Sherrill, R-Asheville; Sen. David Hoyle, D-Gastonia; John Medlin, Jr. of Winston-Salem; Lucy Allen of Louisburg; Charles Mercer, Jr. of Raleigh; Michael Hannah of Raleigh; Kay Hobart of Raleigh; James Talton, Jr. of Raleigh; John Sanders of Chapel Hill, Jack Cummings, Jr. of Raleigh; and Dr. Ben Russo of Matthews.

Wagner is editor of Carolina Journal.