State legislators have begun yet another effort to overhaul North Carolina's tax structure, and they are hoping that this time, after failed attempts in the past, the outcome will be different.
The goal is to revise and modernize the state's system of taxation, which was designed during the Great Depression. In its present form, the system causes volatile fluctuations in the state's revenue collections, exacerbating budget problems during bad economic times.
Overhauling the system carries political risks, however, because any changes will likely harm certain interest groups and benefit others.
The General Assembly has studied tax reform many times in recent years, but it has never enacted significant reform because of the political difficulties associated with it.
Yesterday, members of the N.C. Senate finance committee and the N.C. House finance committee held an unusual joint meeting on tax reform. It was the first in a series of meetings planned for this fall and winter, and some legislative leaders say they hope to work out an agreement on tax reform by the spring, when the full legislature will reconvene in 2010.
"It's unclear where we'll end up at the end of the process, but the meetings signify our commitment to address the issue," said Rep. Paul Luebke, D-Durham and one of the House's leaders on tax issues.
Throughout the daylong meeting, legislators heard presentations from experts on North Carolina's sales tax and how it compares with other states'.
North Carolina relies heavily on sales-tax revenue, but it has become an unreliable revenue source because consumers are increasingly spending less of their money on goods that are subject to sales tax, while spending more money on services that are generally not taxed.
Many experts have advised legislators to lower the overall sales-tax rate while expanding it to include many services. They also advise eliminating many of the sales-tax exemptions.
Yesterday, however, some legislators were clearly worried about the political viability of expanding the sales tax to new industries and groups, even if the rate was lowered for everyone. Responding to legislators' questions, one expert acknowledged that several other states have failed in their efforts to enact similar tax changes.
"I readily admit that it's been politically very trying for states to make these expansions," said Bill Fox, a tax expert at the University of Tennessee.
Earlier this year, during negotiations to resolve a budget shortfall, Senate Democrats pushed for a quick overhaul of the tax structure, but House Democrats balked at the idea.
Democrats ultimately increased the sales-tax rate as part of an effort to close the budget shortfall, but they said the increase would be temporary and promised to return to Raleigh when the dust cleared and work on a long-term plan. Yesterday's meeting was the first step in that plan.
Republicans say they are open to the idea of a tax overhaul that would broaden the tax base while lowering tax rates. But they also want any plan to include a mechanism to restrain the annual growth of government.
Gov. Bev Perdue said yesterday that she supports the legislature's efforts but did not get into specifics about what she would like to see from tax reform.
"I don't know what the timeline will be, but I think it's important that we start working toward the ultimate tax-reform process in North Carolina," she said.
jromoser@wsjournal.com
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