The need to reform North Carolina’s tax structure is urgent. Our state’s economy continues to struggle, suffering from a 9.7 unemployment rate – fifth highest in the nation. Job and income growth in the private sector have been stagnant this decade, as we fall behind regional and national averages. The Tax Foundation ranks North Carolina as having the 7th worst business tax climate in the country.
Indeed, tax reform, in some form or fashion, is almost assuredly coming to North Carolina in 2013. Expect the debate to be passionate and fierce. Various interest groups will advocate or criticize any changes to the state’s tax structure, depending on whether they believe they will be helped or harmed. No doubt plenty of terminology like “revenue neutral,” “progressivity” and “tax incidence” will accompany a bevy of numbers and statistical analyses attempting to slice and dice the reform plans. There will be countless voices wishing to weigh in, and the volume of spin will be dizzying.
For lawmakers, it will be critical to cut through the noise and maintain focus on the basic foundation of what sound, pro-growth tax reform should look like. To do that, they should rely on a handful of guiding principles that economists from diverse backgrounds generally agree upon. These guiding principles include:
Guiding Principles for a Sound North Carolina Tax Structure
- Growth Enhancing – Tax policy should be one most conducive to economic growth, job creation, opportunity and increased financial prosperity for all North Carolinians. Such a policy would encourage capital investment and make North Carolina more competitive at attracting existing businesses into the state, encouraging more new domestic businesses, and fostering expansion of existing businesses.
- Neutrality – Economic decisions should be made for economic reasons, not due to tax considerations. North Carolina’s tax structure should therefore minimize distortions to economic decisions made by households and businesses. The tax system should not favor certain industries, activities or products courtesy of short-sighted political decisions which end up harming businesses not receiving political advantages. As such, North Carolina’s economy will be able to adapt and diversify in concert with an ever-changing, dynamic marketplace rather than being heavily concentrated and tied down to specific industries favored by a biased tax code.
- Stable – The tax structure should be designed to limit fluctuations of revenue during economic booms and busts and thus provide a more predictable source of funding for state government. Such stability will help budget writers avoid future tax rate changes and significant changes in state agency appropriations.
- Transparency – Tax structures should be clear, consistent and predictable. Taxpayers should be well aware of the tax burden in place and revenue estimates should be fully explained in a public manner.
- Simplicity – The state tax code should be easily understood by taxpayers. Compliance costs should be minimized, as should enforcement costs. A simpler tax code increases voluntary compliance and limits the incentives to engage in tax-avoidance activities.