An advisory commission to Gov. Mike Easley in December proposed a far-reaching overhaul of North Carolina’s tax code that would impose a sales tax on services, broaden the tax base, and lower overall rates.
Among other changes in the state’s tax structure, the commission recommended that the state restrict future tax cuts to onetime tax rebates that could be withheld during budget crises; allow local governments to levy certain taxes without specific legislative approval; and transfer Medicaid program costs from counties to the state government, to be paid for by extending a half-cent sales tax that was scheduled to expire June 30.
The panel also proposed that the state remove all caps on the sales tax, simplify the state income tax by eliminating most adjustments to federal definitions of income, and eliminate or reduce tax credits and other tax incentives used to attract businesses to the state.
The commission listed its guiding principles of ensuring that the revenue system be simple, efficient, equitable, competitive with other states, and consistent in providing revenue.
Dr. Michael L. Walden, a North Carolina State University economist and an adjunct scholar with the John Locke Foundation, said he agrees with the panel’s overall goals. But he said he’s concerned that one part of the equation might not pan out — a revenue-neutral reform of the tax base. “What worries people is that they might broaden the base without lowering the rate, leaving people with higher taxes overall,” he said.
The commission focused primarily on the sales tax, because of sagging state revenues during recessions. Last year, the tax generated more than $3.7 billion in revenue, yet fell 6 percent short of projections.
General Fund revenues lagged by $500 million, or 4 percent short, in fiscal 2000-01 and $1.55 billion, or 11 percent short, in fiscal 2001-02.
The services sector offers a dependable source of untapped revenue, the report said, because the state’s economy is growing more dependent on services, thereby diminishing the growth in the sales tax base, which is based primarily on goods.
The Department of Revenue found that the possible tax base of services would nearly double the existing sales-tax base of goods and utilities. As such, the report said, the sales tax rate could be reduced from the current 6.5 percent to as little as 1.75 percent if all goods and services were taxed at that rate.
Wagner is associate editor for Carolina Journal.