Tax reform transforms into old debate

20130718mugMooneyhamby Scott Mooneyham

With the word “reform” in the air, the debate turned into an old one.

For state Rep. David Lewis, a Republican and small business owner from Harnett County, it was about putting more money into the pockets of taxpayers, letting that money and individual initiative spark economic growth.

“We feel confident this will boost the level of economic activity,” Lewis said.

For state Rep. Joe Sam Queen, a Democrat and architect from Haywood County, it was about draining the money required to support state institutions like public universities.

“What is missing is the needed revenue to support the institutions that have driven our economy,” Queen said.

Change the place and names, and those waging this war of words could have been in Washington in the 1980s arguing over Reagan-era tax cuts.

But this debate was taking place in Raleigh. It was supposed to be about tax reform, about whether a state tax structure designed during the Great Depression and heavily dependent on personal income taxes and sales taxes on goods could continue to accurately reflect economic activity.

Instead, it boiled down to the pros and cons of a tax cut. The endeavor — pushed by state Republican leaders including Gov. Pat McCrory — had become mostly that, an eventual $660 million tax cut that could best $800 million over time.

The plan, now awaiting McCrory’s signature, would eliminate a three-tied personal income tax structure for a flat rate of 5.75 percent. It would move the corporate income tax rate from 6.9 percent to 5 percent, and perhaps as low as 3 percent if the state hits tax collection targets.

Sales taxes would be expanded to cover service warranties and amusements like movie tickets, and fully apply to electricity bills.

Those provisions are a far cry from the ideas of earlier proponents of tax reform, ideas that included lowering sales tax rates while expanding the tax to cover a range of services in a service-based economy.

That doesn’t mean that Lewis and company are wrong.

Perhaps an on-paper corporate tax rate of 5 percent (most multi-state corporations already pay a lower effective rate) will help the state be more economically competitive with its Southern neighbors; eliminating a 7.75-percent marginal rate on high wage earners and small businesses might do the same (although eliminating a $50,000 small business exemption could see some small businesses paying more).
Or, Queen may be correct.

Ratcheting up the budgetary pressures on public universities, whose innovations have been responsible for huge corporate success stories in recent decades, will certainly lead to higher tuition, and potentially fewer research dollars and a corresponding brain drain.

Unlike Congress in the 1980s, North Carolina cannot cut taxes and still spend more by borrowing money. The state constitution requires a balanced budget.

So, who is right and who is wrong is going to be pretty self-evident over the next few years.

Republicans now do more than control the levers of power in Raleigh; they have ownership of the state economy.

—Scott Mooneyham covers the state Legislature for the Capitol Press Association.

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