If NC tax deal is reached, will it be true reform?


Associated Press

Posted on July 16, 2013 at 9:00 AM

Updated Tuesday, Jul 16 at 9:00 AM

RALEIGH, N.C. (AP) — Republican legislative leaders and GOP Gov. Pat McCrory pledged to work toward modernizing and simplifying North Carolina's tax code this year, largely by cutting tax rates and eliminating tax exemptions that critics call loopholes.

After several competing plans surfaced — some amended and others shelved — and weeks of unfruitful negotiations, the momentum toward a tax overhaul increased late last week as lawmakers seek to wrap up the legislative session this month. Other attempts at "tax reform" over the past two decades have failed.

"The House and Senate are closer than they've been in months to being able to announce a truly historic tax overhaul," Rep. David Lewis, R-Harnett, the House's point man on taxes, said before entering a weekend of negotiations.

Any final product that clears the legislature and gets signed by McCrory will be scrutinized, particularly on whether it deserves to be called true "tax reform," or just a series of tax reductions that shifts the burden of who funds state government.

The distinction is important among economists, advocates of tax modernization and legislators who said North Carolina's tax system is outdated, originating from a 1930s economy of textiles and furniture. Today's economy relies more on the service and technology sectors.

People across the political map disagree on whether any likely outcome of tax negotiations — a compromise probably somewhere in between the last publicly released House and Senate proposals — fits the definition of tax reform. Part of the reason is because "tax reform" appears to be in the eye of the beholder.

Most reform advocates do agree a modern tax system should subject additional types of consumer transactions to the sales tax so that revenues can be collected on more activities. Those transactions could range from lawn services and haircuts to legal services and warranty purchases. Expanding the number of subjected transactions allows policymakers to lower the sales tax rate without losing revenue.

"Good tax reform is broadening the base and lowering the rate," said Elizabeth Malm, an economist at the Tax Foundation, a conservative-leaning nonprofit think tank.

But any agreement this year is likely to subject only a handful of additional transactions to the combined local and state sales tax paid in most counties, currently at 6.75 percent.

Any agreement also would likely include reducing the number of individual income tax brackets from three to one while eliminating exemptions and capping deductions, and cutting the corporate income tax. Lewis and Senate leader Phil Berger, R-Rockingham, said he feels comfortable calling his chamber's plans "tax reform."

"If we accept that the only way that you have tax reform is broaden the base and lower the rate, I'm not sure you take into account the closing of loopholes, the removal of exemptions, the simplification that takes place," Berger said last month.

Sen. Bob Rucho, R-Mecklenburg, was the chief architect of an early Senate plan that would have raised the number of transactions subject to the sales tax from roughly 30 today to nearly 150. Senate leaders dropped the package when McCrory and House Republicans wanted a more incremental tax approach and interest groups balked at losing their favored tax status.

Rucho said House and Senate plans now being negotiated do very little to meet his goal of tax reform of encouraging job creation through the shift to a consumption-based system.

"Just changing the rates does not constitute 'tax reform.' That's called 'cutting tax rates,'" Rucho said. He joined Democratic colleagues in voting against the Senate's latest offer.

The Democrats largely agreed with Alexandra Sirota, director of the North Carolina Budget and Tax Center, which advocates for the poor. She calls the goals of true tax reform ensuring adequate and stable tax revenues in place for public investments in education, infrastructure and health care and protecting low and middle-income families.

The center said the highest wage earners would receive large tax cuts in the House and Senate plans, while everyone else would pay more. "What we have seen is not tax reform. It's really a tax shift," Sirota said.

The House and Senate plans would slow the growth of state government revenues, resulting in several hundred million dollars less in tax collections compared to the amounts with no tax changes. Republicans say a reduction in tax growth provides tax relief and encourages smaller government —two GOP tenets. They say taxpayers in a wide array of scenarios would see an overall tax cut.

A smaller increase in tax growth would seem to run counter to another traditional trait of tax reform that it be "revenue neutral" — meaning the proposal won't immediately increase the state's share of revenue compared to making no changes. Last week, however, McCrory defined "revenue neutral" differently — having enough money he said "to meet the budgetary requirements of state government."

Dallas Woodhouse, state director of the conservative Americans for Prosperity, said the tax changes need to be viewed through the prism of Republican majorities in the legislature and a GOP governor taking a few small steps when other politicians have tried but failed.

"I do think we are on the cusp of fundamental tax relief and reform," he said. "It really is best to think of tax reform as a journey... it is impossible to do all at once."