EDITORIAL: A new twist in NC tax reform?

Jan. 26, 2013 @ 05:00 AM

Before the election last November, we predicted tax reform would be on North Carolina lawmakers’ agenda this year. Recent events could make the debate on this subject in Raleigh more intriguing than we expected.

Only weeks into this New Year, Republican governors in two other states are proposing to dramatically re-work their state tax systems. Louisiana Governor Bobby Jindal and Nebraska Governor Dave Heineman have recommended eliminating their respective states' personal and corporate income taxes — even though these are primary sources of revenues in both states. The idea is to replace the lost proceeds with additional sales tax revenues. Jindal’s plan also includes eliminating Louisiana’s franchise tax. Both of the governors’ proposals are designed to be revenue-neutral — that is, to generate enough new revenue to replace what the cuts will remove.

Some pundits are already warning North Carolina lawmakers not to make a “consumption tax” part of the reforms. These warnings seem to be built on the assumption that elected officials will be subjected to name-calling and will not be re-elected. We prefer that lawmakers not worry about what they might be called, or the next election. We hope that they will do their homework and make changes that will bring jobs and economic prosperity to all of the state. In other words, to help without hurting.

Many states, as well as the federal government, have created a web of different taxes in order to snare money from as many people as possible. Apparently, the governments believe that their task is less difficult if they just let people share the pain. Obtaining revenues from a great number of activities does appear to do so. One result of this, however, is that some people are taxed over and over, and sometimes on the same income. Many politicians favor this method because it allows them to carve out exemptions and loopholes that promote their social agendas and serve their chosen special interest groups.

For example, Nebraska’s annual sales tax revenue is $1.5 billion, but there are so many special exemptions that it gives up another $5 billion in revenues. Eighty-four different industries are not subject to a sales tax.

The Tax Foundation in Washington, D. C., says, "Corporate and shareholder taxes reduce the incentive to invest and to build capital, while, taxes on income and wages reduce the incentive to work." The foundation also says that taxes on consumption have much less of an impact on incentives to earn and produce.

It’s interesting to note how two instate, conservative-leaning organizations have weighed-in on the upcoming debate in North Carolina. Dr. Roy Cordato, the John Locke Foundation’s Vice President for Research and Resident Scholar, is releasing a new book, First in Freedom: Transforming Ideas into Consequences for North Carolina. Dr. Cordato says an outside analysis shows a consumption tax replacing the state’s income, corporate, sales and estate taxes could produce 80,500 new jobs in the first year, and boost the economy by $11.76 billion.

Another Raleigh-based organization, the Civitas Institute, has published a report that evaluates the economic advantages of replacing the personal and corporate income tax and the franchise tax with a consumption-based tax system. The report suggests this could be accomplished by expanding and slightly increasing the state’s sales tax rate.

With other Republican governors already championing real tax reform, North Carolina’s newly elected Republican governor and General Assembly may be ready to take bolder steps than we originally thought. Bold is good. Smart is better.