RALEIGH – When it comes to big government plans with big sticker prices, I don’t mind being redundant in my opposition.
I’ve written many times in the past about North Carolina tax reform. I think it’s long past due. I think that, as a general principle, taxes should be levied as low single rates on broad tax bases. Taxes should be simple and uniformly applied to everyone in like circumstances, rather than giving special breaks to politically favored behaviors or industries.
But I also think that the kind of tax reform that leaders of the North Carolina General Assembly want to enact is a horrible idea – unworkable, counterproductive, and poorly timed. So I don’t hope that the latest tax-reform initiative will surprise me with a wise outcome, because some possibilities are too remote to merit optimism. I just hope the whole thing collapses.
Why am I so negative? Let me explain my reasons.
First, I don’t think that the leaders of the new initiative, which began Tuesday with a joint House-Senate finance committee meeting in Raleigh, are pursuing tax reform for the right reasons. They simply want to get more money out of North Carolina taxpayers. They think we’re undertaxed. If you start with that assumption, things are destined to end poorly.
As I wrote several months ago, the wrong time to try tax reform is during a recession, when politicians are primarily motivated by maximizing revenue to the state and industries are already coping with difficult and painful shocks to the economic system. Even if a good tax reform package would have winners and losers. It will change the incentive structure in the economy in ways that would likely create short-run transition costs.
If times are good, firms can better handle such transition costs. And if times are good, the state can afford to cut the overall tax rate as a spoonful of sugar to help the medicine go down. But times aren’t good in North Carolina right now. So the timing isn’t good for tax reform.
Second, I don’t think that the leaders of the new initiative are really willing to pursue even their own flawed conception of tax reform to its logical conclusion – that all firms selling services to consumers at retail should be required to collect sales tax.
If I thought the overall tax package would be at least revenue-neutral and if there were simultaneous limits placed on future tax or spending increases and if I thought the retail sales tax could be practically enforced in a future of web-based commerce, then I might well favor the kind of sales-tax reform these legislators say they want.
That means that I’d favor charging a (low and uniform) sales tax rate on all medical, legal, financial, and personal services sold at retail to consumers. But I have absolutely no confidence that the politicians in question will ever do that. These industries are represented by the most powerful lobbies in Raleigh. Any tax-reform package that begins with a broad-based sales tax, offsetting expected revenue gains from taxing services by lowering the current sales tax rate, will inevitably end as a net tax increase meted out selectively on service industries that can’t defend themselves – on barbers, massage therapists, interior designers, auto mechanics and the like.
That’s not tax reform. That’s just another deformed tax. We have enough of them already.
Hood is president of the John Locke Foundation