Gore My Ox? The possibility of tax reform in 2013

We’re hearing that the NC Legislature wants to take on tax reform in 2013 to provide stable, sufficient revenue to fund state government and reduce taxes on the overburdened to encourage growth.  The popular jingle is “expand the base, lower the rate” with regard to sales and use taxes; there is also an effort to eliminate the corporate income tax and close loopholes.

In the past quarter-century there have been two main drivers of NC’s ad hoc tax changes: the national Streamlined Sales Tax (SST) project, and economic recessions.

The goal of the SST is to provide a simple and uniform sales and use tax system across the states with a priority focused on collecting and remitting sales tax from remote purchases to states where they’re owed.  NC is a part of this.

During the most recent economic recessions the legislature stabilized revenues by enacting a number of temporary income tax increases through surcharges or by adding an additional bracket for our highest-earning taxpayers or by temporary sales tax increases.

Politics aside, the temporary nature of these tax changes was intended to maintain the state’s lagging revenue only during the downturn and then sunset as the economy improved.  Politics not aside, these taxes tended to linger.

Closing tax loopholes has a nice ring to it, but the political practicalities aren’t pretty.  Whoever is enjoying those exemptions and refunds will surely show up well-funded to complain, and they include: school districts, local governments, the agricultural and industrial sectors, prescription drugs, food, economic development, and non profits, just to name a few.  Are you affected by any of these?  By the way, those loopholes only add up to about $2 billion; remember that this year’s state budget is $20 billion.

In order for tax reform to occur in this political environment there must be a coalescence of disparate taxpayers and lawmakers who agree to put public policy ahead of political rhetoric – the need must be that compelling. Then is the selection of winners and losers. Not a simple proposition. I am reminded of the sage words of longtime Finance Committee staffer Cindy Avrette, “The devil you know must be more objectionable than the devil you don’t know.”