Tag Archives: Tax Reform

North Carolina Republicans: Tax Reform


North Carolina is dominated by republicans at the state level.  Such domination can be dangerous.  However, it can also make for change that has been decades in coming.

Tax reform is just that change.

Right now North Carolina has a very high corporate tax rate compared to other southern states.  Additionally, the state income tax is also higher than our neighbors.  The thinking is that we would be able to attract more businesses to North Carolina if only our tax structure was more competitive.  I agree.  However, while businesses do look at the corporate tax, I’m not sure how much they look at individual income taxes.

It is with this mix of taxes that the republicans in Raleigh are looking at tax reform:

RALEIGH — A far-reaching plan proposed by Republicans in the state Senate would slow government spending and affect the wallet of every North Carolinian as it slashes income tax rates and raises the cost of food, prescription drugs and more than 100 tax-exempt services.

Senate leader Phil Berger outlined the forthcoming legislation Tuesday, calling it a $1 billion tax cut that is the largest in state history.

“This is a huge change in the way North Carolina taxes its citizens, the way North Carolina generates its revenue to fund services that government provides,” said Berger, an Eden Republican and the Senate president pro tem.

It shifts the tax burden to consumption rather than income, a move that will disproportionately affect low-income taxpayers and families. A married couple with two children making $30,000 a year would pay an estimated $1,000 more in taxes each year, according to a calculator on a political website designed to support the plan. By contrast, a single taxpayer making $200,000 would get a $6,000 break.

Under the proposal: The state’s 7.75 percent personal income tax rate for the top bracket would gradually drop to 4.5 percent over three years, and likewise the 6.9 percent corporate income tax would fall to 6 percent. The estate tax, paid by only the wealthiest taxpayers in 2010, would be eliminated, and the business franchise tax would see a 10 percent reduction.

To offset the cuts, the state would apply a lower sales tax at 6.5 percent to roughly 130 services that are currently exempted, or essentially any service taxed by at least one state.

In short, the idea is to reduce the corporate tax -GREAT idea- reduce the income tax -perhaps a good idea- and lower the sales tax BUT widen the base of that lower sales tax.

In discussing the new structure, I think that the republicans are going to have to be honest and admit that it is what it is, a shift of taxes and a effective increase on the folks who make less money than the wealthy.  It still might not be a bad idea, but it has to be recognized for what it is.

Personally, I would like to see a plan that is closer to revenue neutral for those who would be most negatively impacted.  And this is where it can get tricky.  For example, for those of us who are most poor, we would indeed be faced with a sales tax on food.  However, we have to acknowledge that the money for that food is likely to have been supplemented by government to begin with.

Is taxing food stamps really taxing those that use them?  Perhaps in a way, but not in the way that we generally use the term tax.  What it would do is reduce the amount of food that would otherwise fit in the basket, but it would not be taxing the income of that individual purchasing the food.

The next idea would be that while the tax burden is certainly shifting, and no one should deny that, is it shifting into a more equitable position?  After all, this is more of a “Flat Tax” solution than the traditional income tax only solution.  In fact, other states are even more reliant on sales tax than income tax; think Washington state and Florida.

Regardless of what actually is passed into law, this is certainly an interesting conversation.

North Carolina GOP – Tax Reform

The GOP didn’t do so well at the national level in the 2012 elections.  However, here in North Carolina, the GOP cleaned house.  Not only did North Carolina break for Romney, the only battle ground state to do so, but they elected a republican governor  for the first time in 20 years.  In fact, including this current governor, there have been only 3 republicans in the mansion since 1901, well over 100 years.

Further, the GOP extended their majority in both the state house and senate.  Those majorities are now so wide that the republicans can propose and send to the ballot box amendments to the constitution without a single democrat voting with them.

I don’t think that such dominance is healthy, either way – democrat or republican.  So it isn’t a surprise that one of the first things on the agenda is tax reform:

RALEIGH — Republican lawmakers outlined a proposal Wednesday to revamp the state’s tax system, offering a slew of reforms that would radically shift the tax burden in North Carolina.

The proposal would eliminate personal and corporate income taxes in exchange for higher state sales taxes levied against groceries, medical expenses and other currently tax-free services.

I suspect that this is going to go over like a lead balloon.  So it shouldn’t be a surprise that opposition is already forming:

The N.C. Budget Center, a liberal think tank, conducted a simulation analysis that suggested more than half of taxpayers, particularly the middle and lower class, would see their overall tax burden rise, while the most wealthy would get a significant cut.

Now, I’m not as familiar with the state numbers as I am the familiar national numbers as they pertain to who pays and who doesn’t pay state income tax.  And while I am sympathetic to the argument that an increased sales tax would hit the lower and middle class harder, I am not as sympathetic to an argument that takes a citizen from paying no tax to having some burden to the state.

With that said, I do agree with “Friend of Tarheel” Dave Ribar when he claims:

But critics caution that the proposals represent a fundamental change in who pays the state’s tax burden, and economists said that low-income people would feel the brunt. “For this particular proposal, the responsibility would shift from rich households and prosperous corporations to poor households and smaller businesses,” Dave Ribar, a professor at UNC-Greensboro, concluded in his analysis of the proposal.

North Carolina funds its budget through various taxes working in balance.  While we have high income taxes and corporate taxes, we have a lower sales tax combined with a very inexpensive tax on housing.  Further, our gasoline tax is high compared to our region.

So, while I get the republican’s desire to change the income tax and corporate tax scheme, I’m afraid that they aren’t going to take the whole picture into account and maybe, just maybe, make the whole thing worse.

Here are the details released so far:

It costs roughly $12 billion to eliminate the corporate and personal income taxes and business franchise taxes, as the GOP proposes. The money accounts for more than half the state’s $20 billion annual budget.

Proposed tax hikes

To offset the cuts, Senate Republicans are considering:

• Eliminating all 318 existing tax breaks in the state’s tax code, which account for $9 billion in revenue. The breaks cover everything from motor vehicle taxes to prescription drugs and insulin to sales taxes paid by nonprofits.

• Generating $12.9 billion in new revenue by increasing the 6.75 percent combined sales tax rate levied in most of the state to an 8.05 percent combined state and local tax rate.

The higher rate would apply to all goods and services – including those currently exempt from taxes, such as lottery tickets, haircuts, dentist visits, housekeeping and lawyers’ fees.

One major increase would be the sales tax on groceries. It currently sits at 2 percent but would increase to 8 percent.

Together, the sale tax changes would provide $12.9 billion.

• Levying a 1.05 percent tax on businesses, indexed to either net worth or gross receipts. Republicans are calling this a “license fee” that would produce $4 billion.

• Increasing the tax on all commercial and residential real estate sales, from the current 0.2 percent rate to 1 percent, generating $400 million.

Expect much hand wringing to take place.