Christensen: Here lies NC tax reform; born: 2012, died: 2013

rchristensen@newsobserver.comJune 15, 2013 

Tax reform in North Carolina died last week. RIP.

No one will offer any prayers for the dead or send flowers. Some may not even admit there is a corpse in the room.

But tax reform, once the rallying cry of Gov. Pat McCrory and the GOP legislature in the fall campaign and through much of this year, has flat-lined. In its place is a much more traditional GOP effort to cut taxes.

That is not the way it started. Republican leaders were talking about rewriting the antiquated 1930s tax code that was reliant on manufacturing and is filled with loopholes, exceptions and preferences, replacing it with one more reliant on consumption taxes. Along the way, the Republicans said, they wanted to reduce corporate and personal income taxes to get them more in line with neighboring states.

McCrory said he hoped the tax reform project would be revenue-neutral.

The Senate was ground zero for the effort. Senate leader Phil Berger produced a video touting the tax reform effort. Tasked with coming up with a plan was Sen. Bob Rucho, a Charlotte dentist who is chairman of the Senate Finance Committee.

The outline of the plan was to replace the personal and corporate income taxes by expanding the sales tax to more than 130 goods and services not currently taxed at the state level, including food and prescription medicine. But the proposal was a political minefield. Reinstating the state sales tax on food – one of the most unpopular taxes in North Carolina history – was playing with political matches.

The plan also offended powerful groups – seniors, who would have the exemption on their Social Security payments removed, and the real estate industry, which would have its home mortgage exemption eliminated. Hospitals and nonprofits want to continue their exemption from paying sales taxes.

“There just seemed to be a lot of resistance from a lot of special-interest groups that would rather have loopholes than fair tax policy,” Rucho said.

The proposal would have also extended sales tax to a lot of small-business people – from barbers to people who run lawn services. Republicans like to think of people who operate small businesses as their political base.

Political resolve crumbles

Even though the GOP tax reform would have been either tax-neutral or lowered taxes, it would have meant imposing new taxes on millions of North Carolinians. That could have damaged the GOP political brand as the party of lower taxes.

The Republican legislature has shown that it feels like it can alienate a lot of interest groups, particularly those on the left, and still survive politically. But angering seniors, small-business people, the real estate industry and hospitals was a bridge too far.

Rucho was the GOP point man on tax reform. But when he glanced behind him he found that all his political allies had abandoned him – McCrory, House Speaker Thom Tillis and then even his chief, Berger.

In his letter to Berger resigning as co-chairman of the Senate Finance Committee last week, Rucho wrote: “It’s a huge disappointment that the governor and the speaker of the House did not provide the leadership or have the political backbone to fight the special-interest groups.”

The House has rolled out its plan, and the Senate has rolled out an alternative plan. Those plans focus almost exclusively on cutting corporate and personal income taxes, rather than revamping the 1930s tax code.

So tax reform is dead. In its place, we have large tax cuts, the size and shape of which will be worked out in a House-Senate conference committee.

Cutting taxes is in the Republican comfort zone. Reforming the tax code is not.

Christensen: 919-829-4532

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