The North Carolina state House and Senate Finance Committees kicked off their “Study of North Carolina’s Tax Structure” with a meeting on Tuesday. This year’s study marks the third or fourth such “study” of NC’s tax system since 2000. Every time, the findings are to broaden the tax base (in particular extending sales taxes to services) and to lower the rate.
The political reality of these commissions to study tax reform, however, are unrelated to crafting a tax system most conducive to economic growth and neutrality. The real goal of lawmakers is how to get more taxpayer money flowing into state coffers – especially during times of economic downturns. Why else do these tax reform commissions continue to pop up during recessions?
As the Winston-Salem Journal reports:
The goal is to revise and modernize the state’s system of taxation, which was designed during the Great Depression. In its present form, the system causes volatile fluctuations in the state’s revenue collections, exacerbating budget problems during bad economic times. (emphasis added)
So its the state’s tax system that is to blame for revenue declines, not the actual recessions themselves? That’s backward logic.
A more apt description may be that, as I blogged before, lawmakers are desperately seeking a “recession-proof” tax structure – one that will magically be insulated from economic busts.
But such desires may well be fool’s gold.
Year-over-year sales tax collections for NC, as of April and reported by the National Council of State Legislators (pg. 19), were down 4.1%. Some of the states that tax many more services, however, didn’t fare any better. For instance, Connecticut taxes 79 services and saw a drop of sales tax revenue of 6.4%, New Jersey taxes 74 services and saw a drop in sales tax revenue of 8%. Some of the states that tax a high number of services, however, did show modest gains in sales tax revenue, but it is far from a sure thing.
What is truly needed is spending reform. As I showed before, North Carolina’s history of spending is like a roller-coaster: rapidly escalating during flush economic times and sharp drops during recessions. If budget writers exercised some fiscal restraint during the boom years and more aggressively set aside surplus revenues, there would be much less strain to find the money to cover expenses during the busts. A much smoother spending trajectory would make for more predictable budgeting cycles for state agencies and avoid the legislative hysterics that accompany major budget deficits. Panic does not promote good policy.
Indeed, North Carolina’s tax system does more than an adequate job of capturing revenue during times of economic growth. As this chart shows, from FY 2002-3 to FY 2006-7, growth in state tax revenue far outpaced the state’s GDP growth to the tune of 44% to 26%.
Reforming North Carolina’s repressive, discrimminatory and highly distortionary tax system would be a welcome change. But lawmakers should do it for the right reasons, not as a frantic grasp for more taxpayer dollars in hopes of avoiding necessary fiscal responsibility.