House Speaker Thom Tillis has started talking about tax reform in speeches to business groups across the state. Tillis says he’d like to work toward eliminating the income tax altogether while broadening the base of the sales tax to include more services.
At least the last point makes some sense. Several studies in the last 15 years have pointed out that North Carolina’s tax code was developed 80 years ago when the economy was driven by sales of goods and commodities. It is now far more service-based and most services are not taxed.
A common example of the problem is that people who mow their own grass pay a sales tax on their lawnmowers, but people who hire a lawn service pay no sales tax on the bill.
The solution, favored by most progressives and conservatives alike, is to broaden the base of the sales tax to include most services and reduce the overall rate. That would not only more closely tie the revenue system to the state’s economic activity, it would also make the sales tax less regressive.
Abolishing the progressive income tax would take things in the other direction of course. And folks at lower end of economic ladder already pay a higher percentage of their income than the wealthiest twenty percent of taxpayers.
Tillis is not the first legislative leader to talk about broadening the sales tax base and it is likely he will not be the last. Virtually every service that is not currently taxed has a trade association or well -connected lobbying group working to keep their tax exemption in place.
That means tax reform will be difficult, though it’s not impossible. But it will take political courage for legislative leaders to confront the special interests on tax reform, especially the ones that usually agree with them. The folks currently running the General Assembly have yet to display that willingness to oppose the folks who fund their campaigns.
No one expects meaningful tax reform this year anyway. It will have to wait until 2013. But that doesn’t mean the General Assembly should shy away from tax changes this summer. They will have to consider new sources of revenue or make more cuts to education and humans services on top of the draconian reductions they made last year.
The budget they passed relied on one-time money, disappearing federal funding and accounting tricks to the tune of roughly $1.5 billion. That means they need to cut that much or raise some new revenue to keep state services at current levels next year.
The easiest way to address the problem is to adopt the proposal by Gov. Bev Perdue to raise the state sales tax by 7/10ths of a percent, which would bring in enough money to stave off another round of devastating cuts to programs that are staggering after last year’s budget assault.
If Republicans can’t bring themselves to raise revenue that way, though ought to llook at the latest tax expenditures report from the Department of Revenue that was issued in December.
The report comes out every two years and catalogues every tax expenditure in the state’s revenue system, defined as “an exemption, exclusion, deduction, allowance, credit, refund, preferential tax rate or other device that reduces the amount of tax revenue which otherwise would be collected.”
The 2011 total tax expenditures for the state was 9.2 billion. That’s up from $5.85 billion in the 2009 report. The tax breaks run the gamut from the understandable sales tax exemption for food to the puzzling break that tobacco distributors get if they file their reports and cigarette tax collections on time. Alcohol distributors also get a break for timely collections and reporting.
There’s no break for citizens who file their taxes before the deadline of course.
Multinational corporations are still allowed to shift the profits they make in North Carolina to other states to avoid paying the state taxes they owe, robbing the state treasury of revenue and punishing North Carolina-based companies who compete with the multistate corporations but have no place to hide their profits.
There’s plenty more in the list of $9 billion of tax breaks. Surely the Republicans who remain rigidly ideologically opposed to any general tax increase can muster the willpower to close a few loopholes to keep more teachers from being fired or more people from losing vital services.
If Tillis is serious about tax reform, he can prove it this year. A little tax fairness would go a long way. We will see if he and his Republican colleagues are up to it.