Weekly Briefing

 

The Study Commission that All N.C. Progressives Should Be Following

By Rob Schofield

Quick Take:

• Given North Carolina’s expanding needs and increasingly obsolete and unfair tax system, the new State and Local Fiscal Modernization Study Commission is an important and timely addition to the state policymaking scene.
• At last week’s initial meetings, the Commission got off to a promising start.
• As they proceed, members should keep their focus on long-term reform and avoid the temptation to recommend temporary, quick-fix solutions.

Those who care about making North Carolina a thriving, modern, free and moral state have plenty of battles to fight these days. Whether it’s reducing the scandalous high school dropout rate, covering the 1.3 million who lack health insurance, reducing the childcare waiting list of nearly 40,000 children, preserving and cleaning our threatened air, water and land, or building thousands of affordable housing units, it’s clear that North Carolina has miles to go before it rests.

Unfortunately, none of these problems can be attacked in a fundamental way, much less conquered, in the present environment. Why? Because each requires a public solution and public solutions cost money – money that state leaders have not yet mustered the know-how, vision or courage to raise.

Enter the State and Local Fiscal Modernization Study Commission. That’s a long and bureaucratic name for a group of state leaders who will get together in the months to come to fashion some proposals for remaking a 1930’s-era tax system so that it can address the problems of the 21^st century.

This is, of course, a formidable task. Lawmakers have attempted similar efforts in the past and had little to show. The issues are complex and many powerful, vested interests are certain to resist ambitious change. To make things even tougher, many state politicians remain wedded to the notion that the only way to assess the tax system is by seeing how it “compares” to other states – usually in the southeast. Still others remain mired in the mindset that all taxes (as well as any effort to expand our public problem solving commitment) are inherently evil.     

 

The Reasons to Act

Despite the challenges and causes for pessimism, there are simply too many good reasons “on the ground” for moving ahead with the Fiscal Modernization Study. Here a three:

 

1. The current tax system is out of date. Though it was ahead of its time in many ways 70 years ago, North Carolina’s basic tax structures has changed little since the 1930’s. Today, the system does only an average job of capturing a fair share of economic activity in our modern, service-oriented economy. The classic example of this obsolescence, of course, involves the goods-oriented sales tax, which despite repeated rate increases generates a lower share of total state revenues than it did 50 years ago.

2. The current tax system is increasingly unfair. Next month, the Washington, DC-based Institute on Taxation and Economic Policy will release its newest “Who Pays?” report – a nationwide index that documents the way in which each of the states in the country apportions the responsibility for paying for state and local government. In 2003, “Who Pays?” showed that North Carolina had a markedly regressive system – that is, lower and middle income households paid a higher percentage of their income in state and local taxes than did the wealthiest. In an era of expanding income and wealth gaps, not only is such a phenomenon morally perverse, it is also a part of a kind of vicious circle in which government constantly raises regressive taxes (e.g., sales, cigarettes, and the lottery) that disproportionately affect the very people whose incomes are stagnant.
3. The current tax system is inadequate. Despite the aspersions of anti-government ideologues, the vast majority of state and local government spending in North Carolina goes to pay for essential, core services like education, roads, public safety and health care for the elderly and disabled. As noted above, many basic needs of the state’s rapidly growing and “graying” population remain unaddressed. That North Carolina leaders might actually have the revenues available to undertake any kinds of new or bold initiatives that would usher a real sea change in the quality of life for average citizens is unimaginable in the present structure.    

 

A Cautious, but Promising, Start

The Fiscal Modernization Study Commission convened for the first time last Wednesday and Thursday. During the two-day session, members listened to a series of presentations from an array of academics and analysts who sought to describe North Carolina’s fiscal “lay of the land.” (Note that readers can access the various PowerPoint presentations and written reports by clicking here, scrolling down to the very bottom of the page, and clicking on “State and Local Fiscal Modernization Study Commission”). 

In general, speakers and members seemed to acknowledge the importance of the mission that confronts the group. It was noted, for instance, that the group would not offer a comprehensive report until May, 2008 – something that seems eminently reasonable if there is to be sufficient time to develop any truly significant recommendations for change.

The presentations themselves did a generally solid job of apprising Commission members of some of the key challenges that confront the state. Professor Jim Johnson of the Kenan-Flagler Business School explained the remarkable demographic changes that will confront the state as its population ages and becomes more racially and ethnically diverse. Mike Walden of N.C. State noted the importance of avoiding the trap of measuring tax “burdens” between states without accounting for the crucial societal benefits that public spending can produce. It will augur well for the group if it can sustain the serious and analytical tone of the first two days.

 

Quick Fix Temptations

If there was any cause for concern during the first two days, it was the hint dropped by some that the Commission might serve as a vehicle for promoting a controversial proposal during the 2007 legislative session on the vexing issue of how to relieve counties of their responsibility for helping to pay for Medicaid expenditures. Currently, North Carolina is the only state to require local government to contribute a fixed share of the Medicaid bill. This requirement can be an enormous cost – particularly for smaller, poorer counties.

For years now, lawmakers have discussed various schemes for lifting this local government burden. One proposal that has gained some favor of late would involve a “swap” in which locals would be relieved of their Medicaid bill (along with a portion of the sales tax revenue that is currently earmarked for counties). In exchange, counties would be given authority to raise a new penny on the sales tax on a county by county basis.

While superficially appealing, the sales tax-Medicaid swap represents precisely the kind of short-term thinking that is at the root of many of the problems that the Commission was empowered to address. By raising the regressive sales tax once again without expanding its base (i.e., the services and products subject to the tax) lawmakers would simply be placing a temporary and regressive bandage on a problem that requires a much more comprehensive solution.

 

Going Forward

In the months ahead, the Fiscal Modernization Commission has the potential to be one of the most important study groups established by state lawmakers in many years. Those who care about building the state’s capacity to undertake new and meaningful public solutions to the challenges it confronts would do well to pay close attention and to urge the Commission to keep its eyes on the prize.

 

 

 

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This entry was posted on Monday, December 4th, 2006 at 10:25 am and is filed under Weekly Briefing. You can follow any responses to this entry through the RSS 2.0 feed.