Major legislation to modernize the state's tax system may be postponed until 2011, Democratic leaders in the General Assembly say.
The delay would not be surprising, given that the legislature has been discussing major tax reform for years but has never come close to passing a tax overhaul. Also, the 2010 elections, in which all legislative seats are up for re-election, will make it politically difficult to pass a significant -- and likely controversial -- tax package.
"I wouldn't rule it out, but I wouldn't rule it in either," said Rep. Hugh Holliman, D-Davidson, the House majority leader. "This is a monumental look at a change to our tax structure, and I don't think we want to rush it."
Legislators adjourned their 2009 session in August, after plugging a massive state budget hole with a combination of budget cuts and tax increases. The budget crisis was caused by the recession, but it was exacerbated by the state's old-fashioned tax system and heavy reliance on the sales tax, which creates large fluctuations in state revenue.
When legislators adjourned in August, they promised to spend the fall and winter extensively studying tax reform with the goal of holding public hearings and passing a bill in 2010. Since then, the House and Senate finance committees have met jointly three times, each time hearing presentations from tax experts.
The full legislature will go back into session in May for a so-called short session, which normally lasts only about two months.
The Senate majority leader, Martin Nesbitt, said he believes it's unlikely that tax reform could be passed in the 2010 session.
"The short session is designed really to go down there and make budget adjustments," said Nesbitt, D-Buncombe. "It's not really designed for any kind of major overhaul or major legislation. So it would be difficult to do it this summer."
Many previous committees have studied tax reform without reaching broad agreement on the sorts of changes needed. For instance, most experts and legislators agree that the sales tax rate should be lowered but that it should be expanded to cover many more services. And many of the loopholes and exemptions currently in the state's tax code should be closed, they say.
Still, legislative leaders say that more study is needed.
"The pace is deliberate so that we don't sprint ahead and make changes without full understanding what the changes would mean," said Rep. Paul Luebke, D-Durham and one of the House's chief tax writers.
Over the summer, during budget negotiations, some Senate Democrats proposed a major package of tax changes, arguing that the state's budget crisis provided the best opportunity to enact tax reform. But House leaders did not agree to the package, and legislators, as they have in previous recessions, ultimately relied on an increase to the sales-tax rate to close a budget shortfall.
Democrats said that for tax reform to have a shot at passing in 2010, it would have to have bipartisan support. Democrats do not want to be solely responsible in an election year for a complex tax overhaul that is almost certain to anger certain interest groups. For example, overhaul might result in groups losing their tax exemptions or businesses forced to start collecting sales tax for the first time.
Republicans have expressed general agreement with the need to modernize the state's tax system, which hasn't been significantly changed since the Great Depression.
But they said they would support a bill only under several conditions, including that the changes be revenue-neutral, and that there be some legal mechanism to limit the growth of government spending.
jromoser@wsjournal.com
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