The state Senate is making noises about smart revenue solutions

Quick take: State Senate leaders indicated last week that they are seriously considering a number of significant and far reaching tax policy changes that could be enormously beneficial to the state's long-term fiscal health. Given the tough economic times, let's hope they proceed. A new revenue plan from the N.C. Budget and Tax Center provides an ideal blueprint for them to follow.

The North Carolina Senate is expected to pass its version of a 2009-2011 state budget this week. Given the discouraging level of secrecy in the Senate's process thus far, there were few specifics available at the beginning of the week as to how it would differ from the spending priorities put forth by Governor Perdue. Most observers, though, expect more specific cuts to services (including an increase in school class sizes) and lower tax hikes on tobacco and alcohol.

One very positive sign, however, in last week's news reports, was the word of a Senate plan to advance a package of tax changes that could bring about significant improvements to the state's fiscal health. According to the News & Observer's "Under the Dome" blog:

"Senate Democrats are exploring the idea of overhauling the state's tax system by lowering tax rates but expanding the sales tax, including to some services.

The plan, which has been shared with House members only this week, would lower the existing sales, income and corporate tax rates."

The post went on to quote Senator Dan Clodfelter, probably the Senate's most well-versed tax policy expert:

"Somebody who is now getting away with not paying, while other people pay more than their share, will pay more," said Sen. Dan Clodfelter, a Charlotte Democrat and co-chair of the Senate Finance Committee. Clodfelter highlighted observations from commissions that have examined the tax code in the past and found inconsistencies, such as applying the sales tax to dry cleaning or diaper cleaning but not to carpet cleaning. A lawn mower is taxed but a lawn service is not.

"What can we do to clean up a lot of the things in the current revenue system that make it so riddled with holes that we have to have high tax rates?"

A welcome signal

Clodfelter's comments are perhaps the most positive fiscal policy development of the young legislative session. Though there would obviously be a tremendous number of "devils in the details," the Senator's forecast provides at least some cause for optimism that important state leaders are thinking about something other than quick fixes to the state's revenue crisis.

As has been reported by the experts at the N.C. Budget and Tax Center on previous occasions, North Carolina's current revenue shortfall is not just a byproduct of recession. It is also the result of a tax system that's grown narrow and obsolete in recent decades as the state's economy has transformed.

To do anything other than place a bandage on the problem will require lawmakers to get serious about the kind of smart revenue solutions that the Senator alluded to in the "Under the Dome" story. 

Fortunately, if the Senate's interest turns out to be genuine, Clodfelter and his colleagues will not have to look far to find a specific blueprint for change. Just last week, the Budget and Tax Center released an alternative state revenue plan that provides just such a blueprint.  Here's how BTC director Elaine Mejia summarizes that plan:

"The NC Budget & Tax Center (BTC) has developed a plan for raising revenues that will help to address the state's budget gap while simultaneously improving the long-term stability, adequacy and fairness of the state tax system. The BTC's plan, if enacted, would fill in approximately 30% of the state's budget gap in fiscal year 2009-10 and provide a net tax reduction for the bottom 60% of income earners. By asking large, profitable corporations and high-income taxpayers to contribute to the cost of preserving public investments, the BTC's plan maintains consumer spending and is better for the economy than regressive tax proposals."

 Understanding some of the specifics

Though tax policy can sometimes prove daunting, the BTC recommendations are actually pretty straightforward and easy to follow. To make matters even simpler, the details of the plan are spelled in an easy-to-read "PowerPoint" presentation (click here to access a PDF version). Here are some of the highlights -

On the present situation:

• Not only is North Carolina's current tax system narrow (i.e. it leaves broad swaths of the state's economy untaxed while overtaxing others), it's quite regressive too. Right now, low and middle income households pay a higher percentage of their incomes than do the wealthy.
• Public spending is essential to help stimulate a revival of economic growth. Though easier at the federal level because of the possibility of deficit spending, public spending is also critical at the state level during a recession.
• Right now, North Carolina's public spending lags well behind the national average. We would have to increase spending by more than 18% just to reach the national per capita average. Moreover, spending has fallen since the beginning of the decade.

On what we need to do:

• Broaden the personal income tax base by raising the number of brackets from three to six, lowering rates at the bottom and raising rates on the very wealthy.
• Broaden the sales tax base by including several services taxed by other states and lowering the overall rate.
• Close loopholes that allow profitable corporations to avoid the state corporate income tax and eliminate costly and ineffective business incentive programs.
• Retain a significant tobacco tax hike, but lessen its negative impact on low income people with an increase in the state Earned Income Tax Credit.      

Going forward

If enacted in full, the BTC plan would close a higher percentage of the budget gap (30%) than the Governor's plan (17%), lower taxes on the bottom 60% of income-earners and improve long-term revenue stability and adequacy.

Its only problem, of course, is a political one: To pass it will require lawmakers to think both long-term and outside the box and take on powerful vested interests that employ fleets of well-heeled lobbyists. It will not be an easy task. But if senators do take strong action, it could be one of the most important legislative achievements in decades.

Given the current state of affairs, it's hard to imagine another moment in the foreseeable future in which the public is likely to be more receptive to such bold action.