Current Date: Tue, 11 Mar 2014 14:50:58 -0400
When the N.C. General Assembly convenes on Wednesday, state tax reform will be a top priority for the Republican leadership.
The proposed changes could have far-reaching implications for the state and its residents, including who will pay more in taxes and the amount of state money allocated to the UNC system.
In a press conference, Senate Pro Tempore Phil Berger, R-Guilford, said the Senate would work to lower the income tax, or even eliminating it completely.
The state’s corporate and income taxes account for about 65 percent of the state’s revenue, according to a study by the left-leaning N.C. Budget and Tax Center.
N.C. Rep. Hugh Blackwell, R-Burke, chairman of the House Appropriations Subcommittee on Education, said relying more heavily on the state sales tax could increase revenue, thereby protecting funding for state education.
“If the advocates for the proposed change are correct in their assessment, the new taxation that would be substituted for the old should benefit not just education, but also state activities that benefit from tax revenues,” Blackwell said.
The UNC system accounts for 12 percent of the state budget’s expenses.
Gov. Pat McCrory campaigned on lowering the state’s income taxes, but it’s not clear whether he would support eliminating them.
Michael Walden, an economics professor at N.C. State University, said the income tax is a more volatile means of raising revenue.
“Corporations see their profits go way down. People see the income tax go down,” he said. “You do see that the taxes on spending tend to be more consistent over the business cycle.”
But Walden also said sales taxes tend to be more regressive since lower-income households spend more of their income than upper-income ones.
According to the study by the N.C. Budget and Tax Center, a family earning $24,000 a year would see its taxes rise by $500 if the income tax were eliminated.
Walden said an increased sales tax would need to cover a broader range of items not currently taxed, such as taxes on services.
But the expansion of the sales tax could spark a backlash.
“Many industries will not look kindly,” Walden said. “They say this will put us at a competitive disadvantage.”
Cedric Johnson, a policy analyst for the center, said having taxes cover more services is the cost of eliminating the $12 billion generated by state income taxes.
“The reality is that if you eliminate two-thirds of key taxes, then you are left with one tax to generate the majority of the revenue,” Johnson said.
He also said the proposal would likely not generate any new net revenue, meaning funding for education would not be restored to previous levels.
“When you look at cuts made to higher education, you shouldn’t expect to see revenue funds increase to what they were before budget cuts.”
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