Tax Reform or Tax Tweaking?

by Tom Campbell

Before the January start of this legislative session leaders of both houses proclaimed major overhaul of North Carolina’s tax codes to be among their highest priorities. Three weeks before the July 1 start of the new fiscal year, when tax and spending measures are to be implemented, these promised reforms haven’t materialized, begging the question whether lawmakers have the courage to make dramatic changes or will, like previous legislatures, just tweak current policies?

Few refute the need for reforming tax codes that are outdated, unwieldy, filled with loopholes, preferences and exceptions and do not reflect the 21^st century economy in which we live. There is general agreement to lower personal and corporate income tax rates while broadening the base to include sales taxes on more services. There is less agreement how to accomplish these goals without either big tax increases or giant reductions in revenues coming to state government.

This week we witnessed the difficulty legislators are facing. Three reform plans are on the table, two from the Senate and one from the House. The “Rucho plan,” most identified with Mecklenburg Senator Bob Rucho, would make major and immediate changes. The House plan and another Senate plan, called the “Clodfelter-Hartsell plan,” would make less drastic and more gradual changes. Rucho contends that unless major changes are enacted they do little more than nibble around the edges and continue the practice of favoring certain groups and industries. At a recent Senate Finance Committee meeting he asked how many in the audience were lobbyists. When most raised their hands, Rucho said, “Members of the committee, I just want you to remember those are the folks that are in the process of trying to be sure this tax system stays complicated and loopholes are maintained.” He is right.

Film industry advocates want to continue the big tax breaks received when TV shows or movies are filmed in our state. Hospitals and nonprofits want to continue their exemption from paying sales taxes. Realtors and homeowners want to continue tax exemptions for mortgage interest and property taxes, and nonprofits insist that charitable contributions be allowed as deductions. These and scores of others groups are lined up outside lawmakers’ offices saying they agree with reform but their preferences must be continued. Legislators understand tax reform is not for the faint hearted.

Lawmakers cannot afford to adjourn without some tax changes but they have neither the resolve nor the votes to make sweeping overnight changes. This legislature has proved itself willing and ready to make bold and dramatic changes in many policy areas but will not be so bold in tax reform. Expect to see a package of gradual changes implemented over a period of years. Personal and corporate income taxes will see some reduction while there will be some expansion in services subject to sales taxes, but nowhere near the 130 some have suggested. Great care will be taken to ensure the tax burden on middle-income citizens doesn’t increase significantly.

Lawmakers will claim victory in tax reform, defending their actions by saying the current tax codes evolved over many years and cannot be overhauled in one year. Critics will say they failed in their promise of major change and merely tweaked current policies. Voters will deliver the final verdict in 2014.