From the Editor
By John Drescher – Executive Editor
State Senate leader Phil Berger is a serious elected official with ambition and vision. His tax plan released this week is big and bodacious. His proposal will ignite a fierce debate about the size of state government, who and what should be taxed, and at what rate.
Most everyone agrees – and has for years – that North Carolina’s tax code needs to be updated. It was developed during the Great Depression and, after decades of jerry-rigging, is now pocked with targeted benefits.
Sabra Faires, a former legislative staffer and assistant revenue secretary, ticked off the problems this week in a meeting with reporters: Too many exemptions and credits. Tax rates are too high. Tax revenues are too volatile.
Our state tax structure doesn’t reflect today’s economy. Our sales tax focuses on tangible goods. But our economy increasingly is built around services, most of which are untaxed. Half of state revenue comes from personal income taxes – but that revenue swings wildly depending on the economy. Legislators often adjust rates to balance the budget.
For two decades, others have sounded a similar warning. But no major Democrat – governor, speaker of the House or Senate president pro tem – proposed fundamental change. Instead, they continued to carve out tax exemptions, usually for a favored industry. That narrowed what’s taxed – the tax base – and increased pressure to raise rates.
Berger, a Republican from Eden, would:
• Lower the 7.75 percent top personal income tax rate to 4.5 percent.
• Cut the 6.9 percent corporate income tax rate to 6 percent.
• Lower the combined state and local sales tax (6.75 percent in most counties) to 6.5 percent. But that 6.5 percent sales tax would be expanded to more than 100 services that are now exempt, including professional services offered by attorneys, accountants and physicians.
Berger’s plan also would cut taxes overall, although he has not said how much when fully in place. Indeed, Berger’s plan has not been introduced as a bill and is short on details. Berger pledges to close exemptions to the sales tax, personal income tax and corporate income tax. But it’s unclear which exemptions would remain.
As The News & Observer reported recently, those exemptions add up to $9.2 billion a year (nearly half the size of the state’s $20 billion annual budget). Those exemptions have grown by $1 billion in the last four years.
Some of the $9.2 billion in exemptions benefit much of the state, including the standard deduction from the state income tax. But others benefit a single industry and sometimes a single business.
Berger said on Twitter this week that his plan “eliminates special-interest loopholes that hurt most families.” But Berger himself was responsible for one of the breaks, as The N&O reported recently – a $400,000 annual tax break for the company that owns Lowes Foods.
In taxing many services at 6.5 percent and slashing income tax rates, Berger’s plan appears to shift the tax burden to those with less income. His tax calculator, at nctaxcut.com, shows a married family of four with $30,000 in gross income paying about $1,000 a year more in taxes.
Much of the coming debate will be about the proposed shift of taxation away from income and toward consumption.
Give Berger credit for recognizing a problem and working to address it. Whether his prescription is best is open to debate. Let the discussion begin.