Taxing the truth

May 8, 2013 

The naming of proposed legislation can be a depressingly Orwellian practice in which the title is the opposite of the effect. The latest example is a state Senate proposal to change the state tax code. It’s called the Tax Fairness Act.

Oh, Big Brother, no, it’s not. This is the Let Working Families Pay More And The Rich Pay Less Act.

That title isn’t as catchy, but it has the virtue of being true. If the General Assembly is going to pass some semblance of this proposal, the public ought to know what it is.

Senate leader Phil Berger, R-Eden, joined by Sens. Bob Rucho, R-Mecklenburg, and Bill Rabon, R-Columbus, described the tax plan in broad terms at a news conference Tuesday. (A bill has yet to be seen.) In a supporting video released online at NCtaxcut.com, Berger stands alone in a factory and describes how the plan will make taxes fairer and cost most taxpayers less, thanks to a $1 billion tax cut over three years. If he were selling TVs with such a pitch, his inventory would be gone in 24 hours.

But what’s being sold is North Carolina’s future. Berger, Rucho and Rabon promise it will be a future in which tax cuts for the wealthy and corporations will bring a flowering of new jobs. That promise, so often tested and always found wanting, will fail again. Tax cuts don’t create jobs, and they aren’t a primary reason why businesses come to this or any state. What fuels an economy and fosters business growth are a strong infrastructure, a clean environment and good schools. Those things would be undermined by tax cuts that would reduce public spending in a growing state with growing needs.

The plan’s central elements include a reduction in the state’s income tax over three years from the current progressive rates of 6 percent, 7 percent and 7.75 percent to a flat rate of 4.5 percent. It would also lower the sales tax from 6.75 percent to 6.5 percent and expand it to cover more than 100 services that are currently exempt. In addition, the plan would apply the 6.5 percent state sales tax to prescription drugs and food, which aren’t taxed at the state level. The plan also cuts the corporate income tax and the business franchise tax and eliminates the estate tax.

The NCtaxcut.com site includes a calculator that makes the lopsided nature of this proposal clear. Using the calculator, the N&O’s John Frank found that a married couple with two children making $30,000 a year would pay an estimated $1,000 more in taxes each year. By contrast, a single taxpayer making $200,000 would get a $6,000 break.

To Berger, the new arrangement would be fair because the sales tax would be applied more broadly, services would be taxed equally and everyone would pay according to what they consume. “The more you spend, the more you pay,” he said. “The less you spend, the less you pay.”

Such notions have an attractive simplicity until they are applied to reality. Middle and lower income people often don’t have a choice about whether they are going to fix a car, buy a winter jacket or get groceries. But they’ll pay the same amount of sales tax as a millionaire on those purchases.

Berger tries to sweeten the bitter realities of the plan by touting the reduction in tax revenue as “the largest tax cut in state history.” But that claim doesn’t define the effect by income. Senate Democratic leader Martin Nesbitt did. “This plan actually amounts to the largest tax increase in North Carolina history on the middle class and working families,” he said.

Berger is correct when he says the tax code needs to be changed, but the changes should focus on eliminating the thicket of tax exemptions and credits that benefits special interests as documented by the recent News & Observer series on tax breaks. The senators' plan removes most of the exemptions and loopholes, but it offsets the extra revenue those changes would generate by cutting income tax rates.

The tax code should better reflect the 21st century’s service-based economy by taxing many services that are currently exempt. The plan does that, but it only modestly reduces the sales tax, a regressive tax.

Lowering income taxes on the rich and expanding the sales tax paid by all doesn’t make taxation fairer, no matter what you call it.

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