Don’t dump the income tax

Replacing the state’s income taxes with a bigger sales tax would be unstable and unfair

January 19, 2013 

State Sen. Bob Rucho, who is also a dentist, must have some brave patients because the doctor does not appear inclined toward subtle measures. When Rucho, a Mecklenburg Republican who co-chairs the Senate Finance Committee, examines the state’s tax bite, he sees so many problems he’s calling for the pliers.

Rucho wants to yank the state’s corporate and personal income taxes and business franchise taxes – levies that bring in roughly $12 billion of the state’s $20 billion state budget. He proposes replacing them with a higher statewide real estate transfer tax, a 1.05 percent tax on businesses tied to net worth or revenues and an increase in the combined state and local sales tax from 6.75 to 8.05 percent. The higher state sales tax would be expanded to include a tax on groceries and many services.

The proposal – Rucho prefers to call it a concept – is not his alone. Sen. Phil Berger, an Eden Republican and the Senate’s president pro tem, backed a sharp reduction or elimination of the state’s income taxes in the legislative agenda he announced last week. The state’s other leading Republicans, including Gov. Pat McCrory, also favor shifting taxes from income to consumption.

Indeed, Republicans in other GOP-controlled state legislatures are aiming to sharply reduce or eliminate income taxes. In Louisiana, Republican Gov. Bobby Jindal recently called for ending that state’s income and corporate taxes and for using higher sales taxes to make up the losses. Republicans in Kansas made a big cut in the state’s income tax rate last year. There’s a push in Oklahoma to do the same.

Supply-side economics

The proposed changes in North Carolina and elsewhere are based in part on recommendations from the Laffer Center for Supply Side Economics. Supply-side economics (or “voodoo economics,” as former President George H.W. Bush once called it) didn’t work for the United States. And a year into Kansas’ adoption of tax cuts to spur growth, it’s not working at the state level, either. In fiscal year 2014, the first full year of the new approach to taxes, Kansas expects to see income tax revenue drop by $850 million.

We wonder why such misguided notions endure and fear where they might take North Carolina. Apart from being unreliable as a primary source of state revenue, sales taxes are regressive.

Could it be that Republicans, particularly after the national verdict in November, plan to upend long-established state tax structures under policies that would soak the poor? For that is what this “concept” would mean should it become reality. Those with the least will pay a higher percentage of their incomes for goods and services, and those with the most will enjoy a cut in their state tax payments.

Shifts tax burden

Alexandra Sirota of the N.C. Budget and Tax Center said her group would release an analysis of the Republican tax plans this week. “This would raise taxes significantly for those with the lowest incomes, and 60 percent (of taxpayers) would see an increase while the top 20 percent will get a cut,” she said.

Rucho, in an energetic presentation to reporters last week, said the regressive aspect of the shift would not be so great because the poor – after you add up all the tax breaks, services and supplements such as food stamps – aren’t so poor. He said, in a novel use of the term, that the higher sales tax’s "regressivity" might be harder on high-income people. After all, they spend more and would pay more in sales tax.

The state’s income and corporate taxes provide a solid revenue base that supports the state’s AAA credit rating and a state business climate that is consistently rated among the nation’s best. Sure, the state tax system needs reforms. It’s too complicated and full of loopholes. And taxes on some services may be a sound idea. But adjusting the state’s tax structure and throwing it out are starkly different things.

We’re grateful that Dr. Rucho offered his assessment of what needs to happen to the state tax system, but we hope his colleagues and the state’s business interests will seek a second opinion.

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