RALEIGH — Much of what makes North Carolina communities great places to live, work and do business is the result of good schools, well-maintained parks, innovative industries and fair and efficient courts that we have built and sustained together over the course of many decades.
These last four years, however, have taken an enormous toll on these public structures. Cuts of the magnitude enacted by state policymakers since 2009 have stymied job growth in the public and private sectors in the near term while simultaneously undermining the investments in education, health and public works necessary to pave the way to a more robust, sustainable economic recovery in the long term.
The consequences of disinvesting in our public structures and systems have become all too clear in recent months: fewer teachers and teacher assistants in public school classrooms, university students dropping out due to rising tuition, fewer preschool slots and longer wait-lists for child care assistance for working parents, and long delays for critical clean water infrastructure projects in rural communities.
Next year will bring even more challenges that could further undermine our public systems. Schools face the loss of over $250 million in temporary federal assistance. Our state's Medicaid system faces a combined two-year shortfall of nearly $400 million that could force drastic cuts to vital health services or significant reductions in payments to health providers.
Fulfilling our constitutional obligation to provide a sound basic education to all children will require additional public investment to ensure access to high-quality preschool for thousands of at-risk 4-year-olds.
Policymakers have choices about how to address these challenges. Instead of continuing down a "cuts-only" path that threatens future prosperity, state policymakers should focus on finding the revenue necessary to keep public systems functioning well now and into the future.
Although comprehensive tax modernization is the solution in the long term, there are five revenue-raising strategies state policymakers can take this year to provide a necessary bridge to future reforms:
1. Raise roughly $200 million in additional revenue by putting a cap on tax subsidies that primarily benefit wealthy households. On this strategy, there is already substantial bipartisan consensus. In his recent response to President Barack Obama's State of the Union Address, Republican Gov. Mitch Daniels of Indiana stated that we must "stop sending the wealthy... so many tax preferences that distort our economy and do little or nothing to foster growth."
2. Raise $1 billion in additional revenue by reinstating the temporary 1-cent sales tax, and then double the value of the state's Earned Income Tax Credit. Legislative leaders have cited their concern for struggling families as a major reason to not extend the temporary 1-cent sales tax last year. By pairing an extension of the sales tax increase with an increase in the state's Earned Income Tax Credit for lower-income workers to 10 percent of the federal credit, policymakers could raise substantial revenue while minimizing any adverse impact on struggling families.
3. Raise roughly $250 million in revenue by extending the sales tax to services where most service-providers already collect and remit sales tax on some purchases. A modest extension of the sales tax to some services where the administrative burden would be lowest (such as auto repair, warranty and installation services, and amusements) would raise revenue while also getting a head start on broader tax modernization.
4. Raise up to $100 million in additional revenue by requiring multi-state corporations to pay taxes on all profits earned in North Carolina. The state's current corporate tax laws enable many multistate corporations to avoid paying their fair share in taxes by shifting profits earned in North Carolina to no-tax states. Enacting a reform known as "mandatory combined reporting" would largely eliminate this loophole.
5. Raise up to $90 million by adding a new top bracket to the state income tax. Low- and middle-income families currently pay a greater share of their incomes in combined state and local taxes than do wealthy North Carolinians. A modest increase in the income taxes of the wealthiest would help to partially offset this "upside-down" nature of North Carolina's tax code while also raising additional revenue.
Even pursuing all five of these revenue-raising strategies would not come close to restoring the billions in cumulative cuts to North Carolina's public investments enacted over the course of the recent recession. But action on any of these revenue-raising strategies will demonstrate that our policymakers believe investments in educating our children, supporting our businesses and connecting our communities is worth it.
Edwin McLenaghan is a public policy analyst at the North Carolina Budget and Tax Center.