State looks at tax reform

N.C. legislators are considering proposals to make the state’s tax code more representative of today’s economic structure.

This is the first time the legislature has taken serious steps to reform the tax code since the Great Depression, even as the economy has shifted to being service-based instead of manufacturing-based.

Talks about tax reform have been in the works for many years, but the idea was proposed again this summer in the General Assembly as legislators struggled to balance the state’s $4.6 billion budget shortfall.

Legislators debated between the N.C. Senate’s proposal to tax services and the House’s sales and income tax increases, and agreed to a temporary compromise closer to the House’s plan in order to overcome the shortfall.

Members of the House-Senate joint finance committee met for the first time earlier this month to look for more long-term ways to increase the state’s revenue without increasing tax rates.

“We have high rates now because we tax very few things,” said Sen. Daniel Clodfelter, D-Mecklenburg, who strongly supported taxing services this summer.

Clodfelter said if the state’s tax base is broadened, tax rates could be cut across the board.

Bill Fox, director of the University of Tennessee-Knoxville’s Center for Business and Economic Research, presented information to legislators at the committee meeting. He said North Carolina taxes only 30 of 168 services and could include others such as accounting and legal advice.

The committee will continue to discuss the reform once every two weeks even though the General Assembly is not in session.

“The idea is to bring together some information,” said Sen. Phil Berger, R-Guilford. “I don’t know if there is going to be a bill that’s going to be put forward. Right now they are just presenting information.”

Berger said the information discussed made sense in the academic field but might be hard to apply in the real world.

“Right now with the economic situation that we’ve got, the high unemployment and the reduction of economic activity, I don’t think it’s the right time for us to make significant changes to our tax code,” he said.

Berger said changes to the tax structure could negatively impact businesses which could be dangerous given the economic climate.

“I just don’t think we need to throw another question mark in the air,” Berger said.

Large budget deficits have promoted states other than North Carolina to reform their tax codes in hopes of generating more revenue. California, Texas, Ohio and Michigan are among some of the states that are considering some sort of tax reform, Fox said.

“States seem more inclined to make tax changes during very severe times,” he said.

Clodfelter said North Carolina is considering a more drastic reform than the other states, saying reform could take several years.

“This is important work. It’s not just something you do in a couple of weeks,” Clodfelter said.

“We’ll meet until we come to a proposal we agree on or decide that there isn’t one that we can agree on.”



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