RALEIGH – Part of the conventional wisdom surrounding North Carolina’s budget mess is that our antiquated tax system is part of the problem.
It’s not true. North Carolina has enjoyed huge revenue growth during the past decade, an average rate of 6 to 7 percent a year. Politicians couldn’t help themselves and spent it, creating new programs that ballooned in cost as the 1990s wore on.
There is a gem of truth to the idea that our tax system is broken, however. The sales tax is outdated in a service economy that is at least partly moving to the Web. Our corporate tax code is riddled with biases and confusion. The tax treatment of tangible assets, intangible assets, and investment income is horrid.
But the very same politicians who tug their chins and ruminate about tax reform are the ones who keep making the system worse. Last year, they raised sales taxes by $400 million and are planning to do so again. If the sales tax is so flawed, so regressive, so inadequate to the task of taxing services and goods fairly, then why not reduce North Carolina’s reliance on it in favor of a broad-based income tax?
Because voters detest the income tax and only strongly dislike the sales tax. With the former, they see a yearly tally of the government’s take, and it enrages them. With the latter, they never get an annual bill and see the cost only as it is embedded in the price of goods. Polling done by the John Locke Foundation and others indicates that sales taxes are the least disliked of the major taxes, and are also disliked disproportionately by young people who shop (but who don’t vote very often, so in political terms they don’t count). Middle-age folks are typically in their prime earning years and thus hate the income tax the most. Older folks, no longer paying their mortgages out of escrow and usually on a fixed, lower taxable income, complain about property taxes the most.
Get the picture? Our state leaders may talk a good game about tax reform, but they either don’t really understand the issue or don’t much care about it. They are just following the path of least resistance. They raised North Carolina sales taxes in the late 1980s, the early 1990s, and 2001 (they did exclude food from the sales tax base in the late 1990s). Now they are planning to hike the rate again this year and are talking about making last year’s half-penny hike permanent in 2003, thus yielding a 7 percent statewide rate (with 7.5 percent in Mecklenburg).
If they proceed with this plan, any future talk of our “antiquated” tax system should be laughed out of the room.