State lawmakers heard a familiar plea Tuesday at the second meeting of the latest variation of a commission created to explore an overhaul of state’s outdated tax code. Professors from UNC-Chapel Hill and N.C. State took turns making the case for expanding the state sales tax base to include services and lowering the overall rates.
Several previous commissions have endorsed the idea and the recommendation went nowhere until the last session of the General Assembly, when Senator Dan Clodfelter led a group of Senators pushing to broaden the tax base in budget and revenue negotiations with the House.
No real tax reform made it into the final revenue package, but the discussion prompted legislative leaders to call for the House and Senate Finance Committees to meet jointly before next May’s session to take another serious look at reform, focusing almost exclusively on the state sales tax.
Lawmakers heard again Tuesday that the state’s economy has become significantly more service-based in recent years, leaving the revenue system that is designed to tax only goods out of date and unable to grow at the same rate as the state’s economy.
That makes budget shortfalls more likely and makes them worse in economic downturns like the current recession.
The Federation of Tax Administrators says there are 168 separate services that states could conceivably tax, from pet grooming to water well drilling. North Carolina taxes only 30 of them, well below the national average of 56.
Five states tax more than 140 of the services, Hawaii, New Mexico, South Dakota, Delaware, and Washington.
The economists’ argument for taxing more services is that it not only more closely ties state revenues to growth in the economy, it makes the sales tax less regressive, since high-income earners are more likely to buy services than low-income workers.
That means more equity and fairness, which N.C. State Professor Roby Sawyers told lawmakers are the first principles of sound tax policy. Most of the questions and comments from committee members focused on the volatility of the state’s sales tax with its narrow base.
Sales taxes on goods are more likely to fluctuate wildly than the sales tax on services, primarily because wealthy consumers don’t reduce their purchase of services during a downturn nearly as much as the poor and working poor slow their purchases of durable goods.
Comments from legislators also reflected an obvious ideological bias, as many Republicans tried mightily to challenge the assumption that the current sales tax was regressive and repeatedly sought to lead presenters into criticizing the tax increases passed by the General Assembly this summer.
That doesn’t bode well for bipartisan agreement, which is a shift from previous years, when Republicans supported the framework of reform, but fought individual proposals because they weren’t broad enough and singled out individual services for taxation while leaving others exempted.
Now the opposition seems to come without the overall philosophical agreement, a position strongly encouraged by some of the right-wing think tanks in Raleigh who falsely portray any tax reform as a burdensome tax increase.
The ideologues and the lawmakers who seem to be drawing a line against reform ought to take a look at the experience of other states. There are notable exceptions, but states that tax a high number of services generally have experienced higher economic growth over the last ten years than states that tax few services and had less severe budget shortfalls in 2009.
New Mexico taxes 158 of the 168 cataloged services. Its growth in per capita income and Gross State Product from 1998-2008 exceeded the national average and its budget deficit in 2009 was well below the double digit percentage shortfalls in North Carolina and many other states.
The same was true for Washington, Delaware, and South Dakota, all of which tax more than 140 services, 110 more than North Carolina. Broad sales tax bases are not the only factor in a state’s economic performance and financial well-being, but they play a prominent role.
The question now is how long North Carolina policymakers will refuse to modernize a tax code written 80 years ago that is not only out of step with much of the rest of the country, but threatening the state’s financial future.
Ignoring the special interests protecting their tax breaks won’t be easy. Neither will confronting the ideologues and their anti-tax reform, anti-progress philosophy. But we have waited too long for a revenue system that is fair and equitable and sufficient to meet the state’s needs.
This needs to be the last commission that studies tax reform. It has been studied enough.
