This week’s “Daily Journal” guest columnist is Joseph Coletti, Fiscal Policy Analyst for the John Locke Foundation.
Tax reform was the main topic at the Emerging Issues Forum earlier this month. And what could be more exciting than two days of talk about tax reform? Try two days of tax reform talk interspersed with pleas for more money that would make Jerry Lewis blush.
Most of that talk focused on expanding the sales tax to include services, which account for two-thirds of North Carolina’s economy. A panel of economists expanded the discussion to include tax incentives and the state’s high income tax rate.
Leaders from both parties and around the world agreed that there is a better way on taxes. New Mexico’s Democratic Gov. Bill Richardson said that when he took office his state’s tax system was “a job killer.” He told the audience that cutting taxes, being pro-business, and allowing people to keep their own money are all good things. Former Russian Prime Minister Yigor Gaidar explained why his country moved to a 13 percent flat-rate income tax and the positive effects of that change. Paul O’Neill and Steve Forbes also supported a flat national income tax. Forbes added that a flat tax with a lower rate would also be good for North Carolina, which has one of the highest statutory rates in the country. Even Rhode Island Democrats like the idea.
The John Locke Foundation’s own Dr. Roy Cordato has advocated a flat-rate consumed income tax, effectively a broader sales tax but without increasing the collection burden on service providers. Under this system, all income would be treated like an IRA, taxable only once. It would systematically consider education, health care, and housing as investment instead of the slapdash method of the current tax code.
Even when tax reformers argue that lower rates or fairer rates can raise more revenue, the specific reform plans are designed to be revenue neutral from the start. Just as selling stock or selling bonds can raise the same amount of capital, different methods of taxation can raise the same amount of revenue. So when critics say the current system does not raise enough money, they are arguing for higher rates, not tax reform.
After all, the problem in North Carolina is not that the state lacks money, but that our elected officials lack discipline. For all the claims that it is hard to raise taxes, the General Assembly has done a magnificent job of it in the last five years as part of the spend-and-tax cycle that roughly follows the business cycle. The legislature has added more than a billion dollars from new revenue sources to the general fund budget to pay for spending commitments made during the late 1990s.
Tax receipts started rising again in 2005. Collections for the current fiscal year are already $200 million ahead of forecasts. Just don’t expect to get any of it back. The government growers have already spent it two or three times over, like the lottery money.
This leads the Charlotte Observer to claim that the real problem is tax volatility. If we could only have taxes that level the highs and lows of revenue collection, this group would be happy. Again they look at the wrong side of the equation – they need to focus on the spending.
Common sense tells us that tax revenues rise and fall with the economy, so we should adapt our spending choices to our resources. The General Assembly has not done this. Every time legislators choose to raise taxes instead of cutting spending in the state budget, they put the burden on taxpayers across the state to cut spending in their family budgets at the very time that family incomes are most threatened. That is why successful tax reform will depend upon spending reform.