Taxes and fairness

June 1, 2013 

There aren’t many issues that Republicans and Democrats agree on in Raleigh, but there is this one: North Carolina’s tax code is an antiquated mess of loopholes and exemptions and needs to be made fairer.

That would seem to be a solid foundation for lawmakers to get to work on taxes. Instead, Republicans have chosen to go to work on taxpayers.

Republican tax plans offered in the House and Senate last week differ in degree, but not in effect. They want to change the state’s three-step progressive income tax to a flat percentage paid by all and they want to expand the sales tax to cover more services. The Republican plans also reduce revenue at a time when the state and its needs are growing.

A third, bipartisan plan co-sponsored by Sen. Dan Clodfelter, a Charlotte Democrat, and Sen. Fletcher Hartsell, a Concord Republican, is the most moderate of the three. It would keep state tax revenues the same, but would also make the income tax a flat rate and expand the sales tax. Given the level of partisanship in the Republican-led General Assembly, it’s unlikely a plan co-sponsored by a Democrat will prevail.

That leaves the House and Senate Republican plans. They have the virtue of simplifying the code and eliminating tax breaks held dear by special interests. But they have the drawback of substantially shifting the tax burden downward. The well-off will pay less income tax. Low- and middle-income earners will pay a greater share of their income in sales tax. The Senate GOP plan would repeal the sales tax exemptions of food and perscription drugs and tax Social Security for those with other income sources.

Alexandra Forter Sirota, the director of the Budget and Tax Center at the North Carolina Justice Center, summarized the plans this way: “They all take different roads, but they get to the same place. We still have proposals that are more a tax shift than tax reform.”

State Sen. Bob Rucho (R-Mecklenburg), the Senate Finance Committee co-chairman who helped develop the Senate plan, dismisses complaints about a shift in the tax burden. He thinks the income tax is onerous on everybody because it taxes only part of the economy and stifles growth and the creation of new jobs. He wants to eventually eliminate the income tax and make the state’s tax code primarily “consumption based.”

Rucho says, “You have to get out of the income tax. It taxes production, savings and investment,” which he says stymies the main drivers of growth. “If you’ve got a bad tax, why would you continue using that?”

Despite his aversion to income taxes, Rucho’s Senate plan would tax extra income made by Social Security recipients. But he says that would be just temporary until roaring sales tax revenues allow for the demise of the income tax a few years hence.

For Rucho, it’s time to go big on tax changes. He thinks the other plans are too moderate and tentative. “I’m not going to put a Band-Aid on a bleeding artery,” he said.

The sales tax, of course, is regressive. The more the state leans on it for revenue, the more it leans on those least able to pay. Rucho doesn’t see it that way. For him, it’s fair because there’s one sales tax and everybody pays it.

“Everybody’s going to be treated exactly the same,” he said.

The problem is that, income-wise, everybody is not the same. A truly fair tax code recognizes the difference between the struggling and the well-off and has those who have more pay more.

Republicans talk about making the tax code fairer – the Republican Senate bill is called the N.C. Fair Tax Act – but they can’t let go of the idea that if the rich were just taxed less everyone would prosper. That hasn’t worked and it won’t work.

What’s needed isn’t an unburdening of the rich and the well-off. What’s needed is a cleaned-up tax code that distributes the tax burden fairly and progressively without special exemptions and loopholes.

That’s simple, fair and right. What’s soon to come out of the tax mash up at the General Assembly is unlikely to be any of the three.

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