RALEIGH – It’s only been a week since the details of the N.C. Senate’s tax-hike package began to emerge, and you can already see why complex tax legislation is exceedingly difficult to enact – and why the intentions of tax reformers rarely become reality.
While I don’t agree with the immediate goal of the Senate legislation – jacking up North Carolina’s tax burden by roughly $850 million on an annualized basis – the general concept Senate leaders invoke is reasonable. North Carolina ought to have a broad-based tax code that makes the marginal tax rates as low as possible. The John Locke Foundation’s own tax-reform proposals have long advanced the same general concept.
No tax code is conceptual, however. It is a body of specific laws, regulations, and rules. It is all about the details.
Special interests get their way through a mastery of details. Companies and industry groups find or advocate special exclusions or loopholes that reduce their tax liability or increase the tax liability of competing firms or industries. State and local tax collectors seek to stay one step ahead of other interest groups by issuing new rules and regulations, or seeking new statutes from the legislature. At each step, furious lobbying or political activity creates a new set of details to master, making the tax code ever more complex.
Now that the Senate bill has moved from the status of “on the drawing board” or “general concept suitable for editorial endorsement” into an actual bill, everyone is finding something about which to object. The state’s major hospitals don’t like a proposed $5 million cap on their sales-tax refunds. Industries catering to tourists, ranging from resorts to arts organizations, don’t like the proposed new sales tax on their services. Alcohol and tobacco companies still don’t like the higher excise taxes in the Senate plan, though they aren’t as onerous as the ones in Gov. Beverly Perdue’s original proposal. And many business leaders, both of corporate and non-corporate firms, believe that despite a proposed cut in the corporate income-tax rate, they’ll end up facing higher tax costs in North Carolina because of franchise-tax increases.
Some of the objections are more valid than others. They all reflect, however, the natural outcome of tax legislation in a political atmosphere where lawmakers are really trying to score new revenue, not reform the tax code, and where the various interest groups are all trying to get someone else to pay for government, not joining together to propose a rational tax plan to fund a state government in North Carolina that needs to be substantially smaller than it is now.
As I have previously argued, tax reform can only succeed when it is a net tax cut, not a tax increase. Lawmakers need tax relief both to mobilize the general public to favor the plan and to placate the objections of previously favored groups losing their special tax breaks. Otherwise, they’ll end up compromising in ways that make the “reforms” even less reforming than originally planned, while increasing complexity.
Lawmakers also need to drop some of their more unrealistic goals. For example, both state and local policymakers have for decades schemed to force out-of-town business owners and tourists to pay for government services for North Carolinians. That’s silly. Few economists will tell you that it is wise to tax your exports, which is what such tax schemes consist of. Those who work, invest, and live in North Carolina should bear a tax burden roughly in proportion to the value they derive (at least in theory) from the provision of government services.
Simple, broad, flat-rate taxes on two tax bases in North Carolina – consumed income and property – accomplish this without additional gimmicks or excises. To the extent that tourists benefit from roads, public safety, and an educated workforce in North Carolina, they bear the cost via the prices they pay to drive, rent, and shop in our state, in which are embedded taxes on fuel, property, and income. Ditto for out-of-state owners of firms doing business in North Carolina.
No extra excise taxes. No extra “business” taxes that are just additional taxes on earning income and owning property. No extra taxes on “bad” things or tax exclusions for “good” things.
Keeping it simple is a good rule of tax policy, for all sorts of reasons.
Hood is president of the John Locke Foundation