Most people like the idea of paying lower income taxes — but what if it means paying more for peanut butter, home repairs or prescription drugs?
That’s one of the possibilities as the N.C. Legislature takes up tax reform and the nitty gritty of budget details. Tax reform was part of the Republican platform in last fall’s elections. The GOP-led legislature now looks poised to make good on that promise, although the House and Senate have different ideas on what shape reform should take.
They agree on some main points, such as closing loopholes and lowering the personal and corporate income tax rates, although the House plan wouldn’t cut the rates quite as much as the Senate proposes. Both chambers also envision a slight drop in the combined state and local sales tax (currently 6.75 percent, not including local option taxes applied in Rowan and other counties). The House would set the combined sales tax at 6.65 percent, while the Senate would tick it down to 6.5 percent.
In the application of the sales tax, however, the tax reform plans sharply diverge. The House version would keep the current state sales tax exemption for food (which is subject to a 2 percent tax at the local level) and the exemption for prescription drugs. Senate leaders want those exemptions removed.
The House plan would expand the sales tax to services, but only for businesses that are already collecting tax on tangible items (such as repair parts). The Senate plan would greatly expand the scope of services that would fall under the sales tax, from legal services to lawn mower repair.
The tax reform debate is really an economic debate. It’s an article of conservative supply-side faith that lowering taxes on individuals and businesses leads to more investment, more savings and, as a result, more growth and job creation. Taxing consumption is more broad based, the argument goes, and gives individuals the discretion to pay more or less tax, depending on how much stuff they buy. Hence the Senate’s dubbing its plan the “Tax Fairness Act.”
“The more you spend, the more you pay,” Senate leader Phil Berger says. “The less you spend, the less you pay.”
Sounds simple — if you’re among the fortunate with lots of discretionary income. But applying the full state sales tax to food and medications, as well as to more goods and services, will inevitably result in more out-of-pocket expenses for many people. Middle-income families, as well as senior citizens on fixed incomes, would pay the same tax on a jar of peanut butter — or a furnace repair — as a multimillionaire.
Broadening the tax base is a worthy goal, and the shift to a service economy means more services need to be taxed. But tax hikes on food and pharmaceuticals would fall hardest on those least able to bear the additional burden, and there’s nothing fair about that. Thus far, House leaders are taking a more moderate approach, one the Senate would do well to follow.