RALEIGH – The North Carolina Senate is now considering a tax-hike package that will cost state taxpayers $1.2 billion* over the next two fiscal years. Proponents are, however, describing it as a “tax reform” package that will “benefit” the state by $1.2 billion* over the next two years.
One’s choice of words matters a great deal. Annoyance is not the same as anger. A rebate is not the same as a refund. And raising taxes is not the same as reforming taxes.
My colleagues and I have argued strenuously for years that North Carolina’s tax code is unfair, confusing, and inefficient. We strongly favor reform, including measures that would simultaneously eliminate special credits and exclusions while reducing marginal tax rates, the kind of approach that Senate leaders now say they favor (having previously voted for the current credits, exclusions, and higher tax rates, I feel compelled to point out).
But contrary to myth, now is absolutely not the time to try to enact comprehensive tax reform. Because reform will inevitably increase the effective tax burden of some North Carolinians, the ones who tend to be well-organized to defend and expand their special tax breaks, reformers have to ensure that vastly more North Carolinians will realize significant tax reduction – and that these taxpayers know enough about their stake in reform to fight for it as any tax bill works its way through the legislature.
At the very least, then, sensible tax reform should be revenue-neutral. Preferably, it should result in a large-enough net tax cut to build the political momentum necessary to overcome special-interest pleading. The Senate’s $1.5 billion* tax increase obviously doesn’t accomplish this. It is a revenue grab, not a reform package. Fiscal conservatives should oppose it tooth and nail.
There is absolutely no evidence that North Carolinians are undertaxed. Measured properly, as a percentage of personal income, North Carolina taxpayers pay more for state and local government than does the average American taxpayer. It’s not by much. I’m not arguing that North Carolina is a tax hell akin to New Jersey (yet). But by no stretch of the imagination can the data be contorted to prove that our tax burden is too low – though the data do show that North Carolina’s tax system is more unfair, confusing, and inefficient than that of the average state.
If you still think the Senate tax package constitutes “reform,” then I urge you to push past the rhetoric and look at the details. On sales tax, for example, Senate leaders say we should expand its scope to include services while reducing the tax rate. They also properly recognize that the sales tax should not apply to business-to-business services involved in generating a final, taxable retail product. But what about taxing the retail sale of legal and medical services? The Senate package doesn’t do that. It prefers to increase taxes on such transactions as building repairs and music downloads. Why? Differences in lobbying heft and political influence are the most likely, and most galling, explanation.
I don’t believe, by the way, that lawmakers should really try to expand the current sales tax base. It’s unnecessary and foolish. A properly structured personal income tax – one that applies a single marginal rate to all income that is not saved – would have exactly the same tax base as a properly structured retail sales tax. Both would tax consumption but not investment (because the latter is simply deferred consumption). Tax reform in North Carolina is possible without stirring up a hornet’s nest on the sales tax.
My broader point, however, is that the Senate plan isn’t really about tax reform, anyway. It’s just a big tax increase with a few gimmicks and half-hearted code renovations attached for political cover.
The thing to do in 2009 is simply to balance the state’s budget without any tax increases. Then in a subsequent legislative session, when there is no budget hole motivating desperate lawmakers to panic and pilfer, North Carolina can have a sober debate about real tax reform.
It’s impossible right now.
Hood is president of the John Locke Foundation
*UPDATED based on new information.