Under the Dome today references a recommendation made by Democratic strategist Gary Pearce: that Gov. Perdue should initiate significant state tax reform in the next couple of years.
Pearce, in his Talking About Politicsblog, writes today that Perdue needs to find an issue that will get more attention than recent announcements she has made on new industries, rural health care and nanotechnology.
“It may be time to stop the short-yardage plays and start throwing for big gains,” Pearce writes.
“In fact, it may be time to consider devoting her next two years to what common sense would tell you could be political suicide: sweeping tax reform.”
Such urgings are nothing new here in North Carolina. Indeed, it seems that every other year over the past two decades there has been another type of “tax reform commission” established to study that very topic. Every time, the main recommendations are the same: broaden the tax base (especially the sales tax to include services), lower the rates.
While I agree that tax reform is needed, one of the alleged “benefits” of tax reform touted mostly by those on the left is troubling. As Pearce says, Perdue should push for:
a tax-reform plan that promises to end boom-and-bust budgeting
It seems many of our politicos who are, shall we say, quite comfortable with growing government spending seem to think that changing the state’s tax code will eliminate the need for meaningful spending reform. During the last legislative session, the state Senate seriously mulled over a tax reform plan of their own. Sitting in on some of those meetings, I heard lawmakers discuss their belief that changing the tax code will create a “reliable revenue stream during downturns” and the new tax system will be “recession proof.” In other words, they want a revised tax code that will feed their spending habits even during recessions.
Unfortunately, such a tax system doesn’t look very likely. Specifically, as mentioned above, perhaps the most significant tax change would be to apply the sales tax to services. But research shows this may not produce a reliable revenue stream during downturns. According to the Federation of Tax Administrators, North Carolina already levies the sales tax on 30 services.
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.
Tax reform will serve as no excuse for lawmakers to continue their dangerous habit of ramping up spending commitments during good times only to find themselves wrestling with budget deficits when recession hits.
If you think changing the tax code without also taking a more measured, responsible approach to spending will magically “end boom and bust budgeting”: think again.