Legislators heard a call Tuesday to further expand sales taxes and eliminate the capital stock tax – a conservative think tank’s proposal for continuing the state’s tax code overhaul.
The Tax Foundation, based in Washington, D.C., presented its report on North Carolina’s business tax climate, painting a rosy picture of recent Republican-sponsored cuts in personal and corporate income taxes while calling on the legislature’s Revenue Laws Study Committee to do more.
“North Carolina is one of the states that other states are looking at and want to emulate in many ways,” said Scott Drenkard, the foundation’s director of state projects.
The Tax Foundation ranks the tax policies of all 50 states, and North Carolina has improved from 44th in 2013 to 16th last year, according to its metrics. “That’s the largest jump we’ve ever seen since we started doing this project 12 years ago,” Drenkard said.
But the state still ranks 33rd in the sales tax category because North Carolina’s sales tax is not broad enough, according to the foundation. Republican Sen. Andy Wells of Hickory said that is a cause for concern.
“We’re still in the bad half of the country as far as sales tax,” he told Drenkard. “Can you give us ideas of things we could look at to get our sales tax ranking down?”
Republican legislators have moved in recent years to lower personal and corporate income taxes while adding sales taxes to services that hadn’t been taxed, such as movie, sports and entertainment tickets. Starting in March, the state will tax repair, maintenance and installation services on vehicles, appliances and other personal property.
Last year, the legislature decided not to also tax pet care, veterinary services and advertising contracts – for now.
Drenkard said state leaders should consider taxing more services, as long as they don’t tax service-related transactions between businesses. “The North Carolina sales tax base doesn’t reflect the modern economy,” he said. “The service sector is growing much more quickly as a percentage of the economy.”
Opponents of the shift from income to sales taxes argue that taxing more services will increase the overall tax burden for poor and middle-class residents, who probably spend a higher percentage of income on repairs and maintenance.
Republicans say lower-income residents are benefiting from personal income tax cuts, which include a higher standard deduction. Starting this year, a married couple filing jointly won’t owe income taxes on the first $15,500 in income.
“I hope we can increase that again to $17,000 or $17,500, and that will help the poor,” said Sen. Jerry Tillman, an Archdale Republican.
The Tax Foundation said Tuesday that lawmakers should eliminate the capital stock tax, which taxes businesses based on their overall net worth at a rate of 0.15 percent. That tax generates $550 million to $600 million annually for the state’s $21.74 billion budget.
Drenkard called that tax a “tax on breathing” that remains on the books in only 18 states. Legislative leaders haven’t said whether they’ll seek to kill it.
No other advocacy groups made recommendations Tuesday to the committee, which works on fiscal policy and drafts legislation between sessions.
Alexandra Sirota of the liberal N.C. Budget and Tax Center said the discussion failed to consider the impact of tax cuts on schools, roads and “other foundations of a strong economy.”
“It is not surprising that the Tax Foundation was the only group invited to speak and is giving N.C. high ranks for implementing the policies that they promoted to N.C. policymakers,” she said in an email.
Sales tax on museum shops?
Legislators got an early look Tuesday at a tax bill being drafted for this year’s session, which begins in May.
The 16-page draft bill includes a provision that would add sales taxes to museum gift shop purchases and other transactions where a nonprofit group is selling goods to benefit a state agency or school. The new sales tax would have an exemption for sales that benefit K-12 schools, such as a school stadium concession stand.
Other provisions would make minor changes to the tax code, and some were part of a bill last year that didn’t get a final vote. But for now, the draft is missing one part of Senate Bill 605: The removal of a state funding cap on light rail projects that effectively canceled the state’s commitment to put $138 million toward the planned $1.5 billion Durham-Orange light rail line.
“If we’re looking at what didn’t get enacted, why don’t we look at putting that back here too?” Sen. Floyd McKissick, a Durham Democrat, asked Tuesday.
“We’ll take that into consideration,” replied Sen. Bob Rucho, a Mecklenburg County Republican and co-chairman of the committee.