While many North Carolina voters were heading to the ballot box on November 3 to elect new local government officials, a select group of N.C. House and Senate Finance committee members met in Raleigh to discuss ways of overhauling the state’s tax code. The purported mission of the meeting was to create a way to make state revenue needs less volatile to fluctuating economic changes. In the works is an on-going discussion on how to ensure a stable, fair system of taxation in the state.
Taxpayers’ fear: Those changes to the tax code will only mean higher taxes.
The phrase often uttered when talking about tax reform is “broaden the base and lower the rates.” Meaning more things, like services, downloads and other e-commerce transactions will be taxed while overall sales and income tax rates will be lowered. Many people may be familiar with a proposal being floated in the U.S. Congress called the FairTax (HB 25), which would replace the current monstrosity of a tax code with a national retail sales tax. The tax reform being discussed in Raleigh is similar in idea, although having some key differences – namely, the FairTax eliminates all taxes other than the sales tax. The tax reform proposals being debated in Raleigh will leave almost all forms of taxation in place, albeit with lower rates.
This skepticism is undoubtedly born of the General Assembly’s less than perfect record at keeping its word on taxes. In 2001, in the midst of our last economic downturn, the General Assembly and Gov. Easley implemented “temporary” increases in the sales and income taxes that were supposed to expire after only two years when the economy had recovered. Those taxes were repeatedly extended and eventually a portion of the sales tax increase was made permanent.
This pattern undoubtedly is in voters’ minds when they are polled on tax reform. The North Carolina Senate attempted to pass a version of tax reform within its budget this year. The Senate plan would have reduced state sales, income and corporate taxes, but would have also begun taxing an unspecified variety of services: LLCs franchise tax, Internet downloads like software, iTunes purchases and ringtones. All told, the net increase in taxes would have been more than $500 million, but their idea of reform was eventually scrapped for the promise of revisiting the issue at a later date.
The Civitas Institute has been polling voter opinion on tax reform for much of the year and a consistent theme has occurred – voters are against it. When we first asked voters what they thought about reducing tax rates, yet extending taxes to services like auto repair, home repair and warranties back in May, 57 percent of voters said they were opposed to the idea. When they were told that the tax reform would equate to a $500 million tax increase, opposition spikes. Again when the issue was polled in October, 59 percent of voters said they were opposed to a plan reducing sales and income taxes, but adding taxes to services.
From a purely ideological point of view, fundamental tax reform that eliminates taxes on income and investment and moves towards a consumption-based tax system is something that conservatives can rally around. For the General Assembly’s tax reform to succeed, a vast majority of voters in North Carolina need to be convinced that taxes won’t be raised and the reductions in rates will be permanent in nature. Unfortunately for the General Assembly, its reputation on these issues is severely damaged.