First of a series
A defining question in the governor’s race will affect the pocketbooks of every North Carolina resident: Who should pay taxes and how much?
Democrat Walter Dalton and Republican Pat McCrory are traveling the state touting wildly different tax plans as part of their pitch to revive the state’s economy and remedy the persistently high jobless rate.
Dalton offers modest tweaks to the tax code with a combination of incentives and tax breaks, while McCrory is pushing for a complete overhaul that could shift the state’s tax burden by billions of dollars.
“I think the tax issue has replaced education as the top issue, as it was during the Hunt, Easley, and, to a lesser extent, Perdue campaigns, because state races have become nationalized,” said David McLennan, a political science professor at William Peace University, referencing the last three governors. “Since Ronald Reagan’s election in 1980, every winning presidential candidate is the one perceived to be the one most able to cut taxes. What we are seeing is McCrory tapping into that trend and the public’s sentiment that lower taxes benefit the economy.”
Dalton, the current lieutenant governor, wants to offer small businesses a break by exempting the first $25,000 in corporate taxable income for businesses making $100,000 or less and the first $15,000 for those making $200,000 or less.
His plan includes a $2,000 tax credit for businesses that hire long-term unemployed workers and supports the extension of a federal wind energy tax break.
“I think it goes a long way toward putting people back to work,” he said.
Another of Dalton’s proposals would restrict a $3,500 personal income tax cut crafted in 2011 by Republican state lawmakers to just small business owners. A last-minute change to the law removed a cap that would have limited the tax cut to businesses with less than $825,000 in revenue, extending the break to partners in law firms, medical practices, and lobbying firms.
The cap would generate an estimated $141 million in state revenue and more than pay for Dalton’s two tax breaks, which would cost roughly $30 million, according to his campaign.
McCrory: big changes
McCrory, the former Charlotte mayor, calls the state’s tax code antiquated and uncompetitive, hurting the state’s ability to recruit and retain businesses.
His proposal would reduce the state’s corporate and personal income tax rates to make them competitive with neighboring states and possibly eliminate them altogether – two proposals also being considered by the Republican-led Legislature.
McCrory offers no specifics about how much he would cut the rates. But he said his tax revisions would be “revenue neutral,” meaning that he would need to raise billions of dollars through new or existing taxes to maintain state spending levels – a point he refused to acknowledge in a recent interview.
McCrory also declined to list any taxes he would consider increasing, nor would he identify spending he would cut. He did pledge not to raise taxes to generate additional revenue.
“What I plan to do is look at all revenue options that at least make our income tax competitive with our neighbors,” he said. “I’m not going to come up with this plan by myself. ... My goal is to come up with a bipartisan plan because there are Republicans and Democrats that know we have to do something.”
The lack of detail makes the price tag for McCrory’s plan hard to determine.
The state’s current tax system relies on the personal income tax, which ranges from 6 percent to 7.75 percent depending on income level, to fund half the state’s $20 billion annual budget. The 4.75 percent sales tax accounts for the next largest chunk, $5.3 billion in revenue last fiscal year.
The state’s 6.9 percent corporate income tax brought in $860 million in revenue.
If McCrory reduced corporate and personal income taxes to the median flat rate of North Carolina’s neighboring states, the state would lose an estimated $2 billion in revenue a year, according to a News & Observer analysis confirmed by state fiscal researchers.
Eliminating them completely would cost about $11 billion, or more than half the state’s annual spending. The figures include the state’s estate tax, which McCrory also wants to eliminate; it brings in about $50 million a year.
With education and health care spending consuming 80 percent of the annual state budget, any tweaks in taxes could mean major cuts to those areas.
The only ideas McCrory offered to help pay for his plan included streamlining state spending and getting new revenue from natural gas and oil drilling, though he acknowledged it will take years to see that money.
“The first thing I am going to be looking at is expenditures,” he said, looking for ways to “spend it more efficiently.”
In terms of taxes, McCrory points to Tennessee and Florida as models: two states without a personal income tax that rely on much higher sales taxes and other consumption taxes.
But the potential cost of his proposal appears to be influencing the way McCrory talks about his plan. In a recent interview, McCrory softened his language to downplay the likelihood of completely eliminating personal and corporate income taxes, favoring a reduction instead and suggesting any changes would be incremental.
A new tax code?
It’s not a new idea to completely revamp the state’s tax code, but previous efforts met political and budgetary roadblocks.
Democrats tout studies that rank the state’s system among the more progressive in the nation, meaning people with higher incomes pay a higher percentage of their income in taxes. Republicans highlight different reports that show the current tax code is harmful to business compared to other Southern states.
As part of their platforms, Dalton and McCrory propose a comprehensive review of all existing tax breaks and credits currently on the books. The state Department of Revenue has identified more than $9 billion in annual tax breaks; they range from popular and broad individual income tax exemptions to more targeted breaks for businesses and special interests.
Roby Sawyers, an N.C. State accounting professor who has studied the state’s tax system, said North Carolina needs to broaden its tax base because of its over-reliance on personal income tax, which provides plenty of money in good economic times but not enough in periods of decline.
At the same time, he said totally eliminating the personal income tax would likely lead to higher consumption taxes or new taxes on services. “Totally getting rid of personal income tax policy is pretty dramatic,” Sawyers said. “It’s hard to see where North Carolina would raise that additional revenue unless you really broaden the sales tax.”
It is possible to craft the changes to not hurt low-income people, he said, but “certainly there are going to be winners and losers regardless.”
This possibility is raising the stakes in the governor’s race. The competing tax plans dominated the conversation last week on the campaign trail.
Without specifics, Dalton said McCrory’s plan amounts to “platitudes – it has no substance at all.” He said that McCrory will need to increase taxes dramatically to balance his proposal.
“He talks about the redistribution of taxes,” Dalton said in an interview. “If you look at that plan, it really has to put more burden on the middle class, on working people, on our senior citizens.”
McCrory denies the assertion, saying he won’t increase sales taxes. McCrory says Dalton’s plan won’t do enough to improve the state’s business climate.
“I think we need a whole comprehensive approach that is more consistent and predictable, as opposed to piecemealing our tax code, which is what his proposals do,” McCrory said.
‘Trying to survive’
Voter sentiment seems to support comprehensive changes to the system, or at least lower taxes.
Behind the counter at her novelty gift shop in downtown Cary, a voter-rich suburb of Raleigh, Lynn Rogers was quick to list the woes of a business owner in this economic climate. The empty parking lot and shelves full of local crafts and art told part of the story.
“I’m just trying to survive,” she said. “The middle class and small business, those are the ones that get hit.”
Rogers said she wants to see lower taxes, if not more substantial measures such as government-backed grants, to help rescue hurting business owners. More than anything, she needs the candidates to offer specific plans.
“Spell it out,” she said. “And if you are saying you are going to do it – do it.”
Jacob Ziegler, 32, sat at a metal table outside Ashworth Drugs waiting for the bus he rides to work. A server at the local Chili’s restaurant, he said he hasn’t seen a paycheck in a year and a half, so he lives on tips. He makes $2.13 an hour, and after taxes on his tips are deducted there’s nothing left.
He said he doesn’t want to see sales taxes increase because it means customers eat out less and leave smaller tips. But at the same time, Zeigler’s mother works for the state prison system and any cuts to state government may affect her job. “I’d like it (to) be a little better,” he said of his tax burden, “but it is the way it is.”
At Kevin Jennings’ Urban Food Group, which owns six restaurants and employs 250 people, a tax cut would help him expand to new territory. “If you save us money, we’re going to pump it back into the economy because that’s our mentality right now,” the Raleigh businessman said. “We’re in expansion mode.”
In his mind, taxes are a delicate balance. “I don’t have a problem paying taxes up to a certain amount,” he said. “But I would say taxes need to be reduced because government needs to spend less.”
Staff researcher Peggy Neal contributed to this report.
Next Sunday: Energy issues