The Grinches who stole the tax credit

by Tom Campbell, Executive Producer and Moderator, NC SPIN, December 18, 2014.

Governor McCrory and others are advocating the restoration of the historic preservation tax credit. They raise the larger question of how North Carolina can have tax reform (that supposedly closes loopholes) while allowing loopholes?

For decades it’s been obvious that North Carolina’s tax codes, first written in 1939, needed overhauling. Like ornaments on a Christmas tree we’ve added and revised one provision after another. The task of tax reform would have been much simpler had our policymakers wiped the screen clean and started from the beginning. More expedient, more efficient, even more intelligent, but a politically impossible task to achieve.

Credit legislative leaders for at least undertaking tax reform, but the net result of their 2013 efforts amounted to little more than tax cuts, a few expanded sales tax categories and the closure of a very few loopholes. There were some 320 tax exemptions, exceptions or preferences on the books, the ornaments we’ve hung on our tax tree. If eliminated altogether these loopholes would add some $9.2 billion a year to the state treasury. Some included popular breaks like the standard income tax deduction and personal income tax exemption, but many were industry specific, applied to nonprofits and favored specific businesses, including economic incentives given to companies to locate or expand in our state.

The legislature left most of the loopholes in place, promising to revisit them at a later date. Two they ended have drawn quite a bit of attention; the 25 percent tax credit given movie and television companies to produce films in our state and the tax credit given those who restore historic buildings.

It is great having big name movie and TV personalities filming in North Carolina but the war with other states resulted in the escalation of tax exemptions out of proportion to the benefits the state received. For example, hundreds of thousands of dollars were given TV networks to produce programming in Charlotte during the Democratic National Convention in 2010, shows that likely would have been produced given little or no incentives. Film tax credits are estimated to reduce state revenues by 60 million dollars a year.

The historic preservation tax credit appears reasonable. In a disposable, throwaway culture this credit encourages people to honor and preserve our past. Anyone willing to undertake the preservation of a historic structure can receive the credit provided they meet certain basic criteria. It creates jobs and beautifies our neighborhoods and communities. It is hard to argue against a loophole with so many obvious and lasting advantages.

Lawmakers come off looking like the Grinch who stole Christmas. They face a classic Gordian knot, a seemingly unsolvable problem, namely if you are going to allow any tax loopholes how do you choose the winners and losers? Why close a few, including two popular loopholes, while leaving so many untouched?

True reformers say that we shouldn’t allow any tax loopholes, that our system for taxation would be fairer and simpler if we eliminated them all and they are correct. But we didn’t and now it is difficult to justify eliminating a handful while allowing so many. Our message to lawmakers, much as Desi Arnaz used to say to Lucy on the old “I Love Lucy” television show, “You’ve got some ‘splainin’ to do.