The General Assembly is notorious for moving slowly on important issues.
Faced with the most serious financial crisis since the Great Depression, legislators are finally discussing modernization of the state tax system. Had they done so a few years ago, today's revenue shortfalls would be far less severe.
Today's state tax system is designed to raise revenues in a mid-20th century, manufacturing-heavy economy. As much of the economy has moved into services and manufacturing has moved offshore, the state has faced structural deficits in many of the last 20 years.
Rather than fix the tax structure that was causing the shortfalls, legislators applied temporary patches. For example, they responded to the 2001 revenue shortfall with higher sales and income taxes. Legislative leaders and the governor promised to quickly roll them back but took years to do so.
This year, Sen. Dan Clodfelter, D-Mecklenburg, is proposing to revamp the tax system. He would apply the sales tax to some services and extend other taxes to a broader range of commerce. In principle, it is a very significant step in the right direction. But because Clodfelter's reform comes amid enormous revenue shortfalls, he is also proposing a massive tax increase -- somewhere in the range of $500 million to almost $2 billion, depending on estimates.
To be fair, it's impossible to price the eventual size of the tax increase because this proposal will undergo numerous changes before -- and if -- it becomes law. At the same time, however, it is obvious that the bill is a tax increase.
Had the legislature tackled this issue during good times, the expanded tax base could have allowed a significant cut in tax rates. The result would have been a revenue neutral package better suited for today's recession.
As legislators consider Clodfelter's proposal, and both the higher taxes and tax shifts it will bring, they must be fair to the average North Carolina family. As they cut some tax rates while broadening the tax base, they must not load the tax burden onto working people and consumers. Wealthy residents and businesses must pay a fair share, too.
Clodfelter's broadened tax base appears to hit services used by consumers while not touching accounting and legal fees. If these fees were also covered, the tax would raise enough new revenue to allow a larger cut in the sales tax on consumer goods than Clodfelter now proposes.
Tax reform is needed but it must be applied fairly and evenly across the broad spectrum of taxpayers.
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