RALEIGH – There are many complexities embedded in the issue of tax reform – now getting a lot of attention in the North Carolina General Assembly – but one worthy objective is fairly simple to explain.
Indeed, it is simplicity itself. North Carolina’s tax code needs to be simpler. The state should provide North Carolina taxpayers with a clear, comprehensive accounting of how much they pay to fund government services. Taxpayers, in other words, need to get a bill.
That’s the tool we use to inform our decisions on most major financial decisions. If we need home or car repairs, we obtain bids from one or more vendors who are obligated to describe in detail the job they are offering to do and how much it will cost. If we seek to buy a house, refinance our mortgage, insure our car, enroll our children in college, or create a retirement pan, we are best served by receiving clear, comprehensive statements from the relevant institution spelling out the costs and benefits of each option.
So receipts, invoices, and billing statements are an integral part of our lives, for good reason.
Government taxes and fees make up a significant share of household budgets. On average, says the Tax Foundation, the cost of financing government at all levels consumes nearly a third of all personal income in the United States. Of course, that’s the average. The median household likely spends a bit less than that on taxes and fees. However, that would still make the bill for government one of the biggest any household shoulders in an average year – not as much as the rent or mortgage, perhaps, but more than a household typically spends on the other big-ticket items I previously mentioned, such as cars or insurance policies.
Shouldn’t taxpayers receive at least as much information about their tax bill as they do other bills?
Of course, the situation isn’t entirely comparable. You are free to make the choice of whether to buy a house, a car, or a college education for your kid. You are not free to opt out of paying for government, regardless of how much (or how little) you think you benefit from government services.
But taxpayers are also voters. On Election Day, they get a say in electing the representatives who tax them – and in some cases, such as local referenda, they get a direct say in determining their tax bill. In that sense, then, taxpaying voters are akin to potential purchasers of other high-dollar goods. They deserve a clear, comprehensive accounting of the cost of government, so they can decide if they think the current level of service is worth the expense they incur.
Complex tax systems, based on multiple levies assessed at various stages of production and consumption, do not satisfy this need for public information. With income taxes, you do get an annual bill – though tax withholding somewhat obscures the full effect on household budgets. With property taxes, those who own their homes free and clear get a real bill, and are often angered by it. But just as withholding makes the income-tax bill fuzzy, the use of escrow reduces the information content for property taxpayers with a mortgage. And as for sales taxes, while consumers typically get a receipt after every retail sale that details how much, if any, of the price reflects the sales tax, consumers have no practical way of knowing how much sales tax they pay through the year.
Worst of all, taxpayers have no practical way of knowing how much of the cost of the goods and services they purchase originated as a corporate-income tax, a franchise tax, a business-privilege license, a tax on energy used in production, or some other tax or fee.
Perfection is unattainable. But North Carolina could move closer to the concept of an annual billing statement for government by reducing the number of separate taxes. For example, instead of levying a tax both on income and on sales, we should tax all income that North Carolinians spend once and only once. I think the best way to do that is to phase out the sales tax in favor of a consumed-income tax, paid annually.
When I made this proposal on a tax-reform panel several years ago, one of my fellow panelists objected. She said that would never fly because the rate would be so high that voters would rebel – which was, of course, my point.
I haven’t asked her lately what she thinks of the idea. In fact, I don’t see Kay Hagan around Raleigh at all anymore. She’s elsewhere.
Hood is president of the John Locke Foundation