First Posted: 9/28/2012
I don’t find the structure of North Carolina’s tax code to be at all surprising. I find it confusing, destructive, unfair, and absurd, as do most folks who have studied it. But no one should ever be surprised that tax systems are screwy. They get that way for a reason.
You can see why by looking at the North Carolina governor’s race.
For at least two decades, the Democrats running state government in Raleigh have repeatedly called for fundamental tax reform. They have convened working groups and blue ribbon commissions. They have held hearings and met with editorial boards. They have observed that North Carolina’s tax system — based on high income taxes, sales taxes that apply to goods but not services, and countless exemptions and tax giveaways to special interests — was created decades ago, for an economy that no longer exists, and has evolved since then based on political rather than economic considerations.
These liberal tax reformers had a different goal than conservative tax reformers did. Liberals think that state government confiscates too little of the income of North Carolinians and want to increase the overall tax burden. Conservatives believe that tax reform ought to be at least revenue neutral, and preferably a net reduction in the tax burden. We see the deleterious economic effects of high marginal tax rates on work, savings, and investment as the real problem, and North Carolina’s weak economy as evidence of it.
Nevertheless, the two groups of tax reformers share some common conclusions and proposals. We agree that the corporate income tax is an utter mess, too costly to collect per dollar of revenue. We agree that the current mixture of franchise and business-privilege taxes is illogical and ill-advised. We agree that the current sales tax is unfair and regressive, and that consumption taxes should not favor services over goods.
In 2011, Sen. Dan Clodfelter, a liberal Democrat from Charlotte, offered a tax reform plan that included a phase-out of the corporate income tax, a simpler tax on business property or net worth to replace the franchise tax, and a broader sales tax that puts some services in the tax base in exchange for a lower tax rate. Conservatives disagreed with other parts of Clodfelter’s plan, such as its multiple marginal tax rates on income, but it was a useful starting point for discussion.
Fast forward to the 2012 governor’s race, and what do you see? The Republican nominee, former Charlotte Mayor Pat McCrory, is saying that fundamental tax reform would be one of his priorities. Although McCrory has offered few details, it’s not hard to discern that he would be amenable to something along the lines of what most tax reformers have been talking about — such as broadening the sales tax base and reducing or eliminating corporate income taxes.
Meanwhile, Democratic Walter Dalton, Clodfelter’s former Senate colleague, is running against fundamental tax reform. He opposes applying the sales tax to services. He wants to make the corporate income tax even more complicated, and preserve the kind of targeted tax credits for politically favored businesses that have failed to strengthen North Carolina’s economic competitiveness.
Dalton isn’t doing this because he truly thinks the past 20 years of tax reform debate has been wrongheaded. He’s doing this because he is desperate, and because it is easier to scare voters with misleading rhetoric than it is to explain how the various elements of a reform package would work together to make the tax code fairer, more efficient, and less harmful to economic growth.
I doubt Dalton’s gambit will work. Even if Barack Obama wins North Carolina again, McCrory will likely be the next governor. But McCrory and legislative leaders need to keep this in mind: Tax reform is much easier said than done. That’s why it hasn’t yet been done. The interest groups that derive benefits from the current system will fight tooth and nail to preserve it. And opportunistic politicians will play along.
Please plan accordingly.
John Hood is president of the John Locke Foundation and author of Our Best Foot Forward, a book on North Carolina’s economy. It is available at JohnLockeStore.com.