A fairer tax system would help taxpayers and boost revenue

by Ned Barnett, News and Observer, March 1, 2014.

It’s tax season, and taxpayers are starting their annual journey into the convoluted landscape of the tax code. Their goal is to find what they owe or are owed, but it’s time taxpayers also got serious about calculating the scale and fairness of taxation itself.

Here are the three big issues with taxes:

• The tax code should be simplified. On this, almost everyone agrees.

• Tax laws should be changed to redistribute the burden upward. Here, most people agree.

• Taxes should be broadly increased. Good luck with that one.

In North Carolina, the Republican-led General Assembly revised the tax code last session with changes most taxpayers will encounter when they file next spring. The changes simplified the state income tax by removing multiple deductions, increasing the standard deduction and collapsing the three-tiered tax rate of 6, 7 and 7.75 percent into a flat rate of 5.8 percent in 2014 that falls to 5.75 percent in 2015.

But lawmakers failed to improve the code’s fairness, giving high earners by far the most tax relief. And they failed to accomplish the basic purpose of taxes: to raise sufficient revenue for the state’s needs. Instead, the new tax law will cut state revenue by an estimated $2.8 billion in its first five years, even as the state’s population grows and its neglected needs become acute.

The legislature’s leaders don’t see it that way. They argue that the flat-tax rate is simpler. They say giving more tax relief to high earners and corporations will produce trickle-down benefits in the form of jobs and small-business income. And where critics see unmet needs, they see a reduction in unnecessary and even wasteful state spending.

It’s bewildering that support for the “trickle-down” approach hasn’t faded after decades of tax cuts for the rich that haven’t produced job growth. And it’s frustrating that claims of rampant “wasteful spending” can’t be dispelled despite five years of tight state budgets and the $3.3 trillion in federal deficit reduction enacted since 2010. These illusions will persist until the folly of coddling the rich is more widely understood and the destitution of underfunded government becomes intolerable.

But sometimes tax reality leaks out in taxpayers’ tax bills.

Last week, we published a letter from Robert Horton of Garner headlined “Tax hike ahead.” Horton and his wife are 73-year-old retirees living off pensions, IRA savings and Social Security. With deductions lost under the state tax changes, especially the deduction for medical expenses, Horton said seniors could face tax-bill sticker shock next spring.

In estimating his 2014 tax bill, Horton wrote, “I discovered that our taxes will rise from $185 [under the previous code] to $900. That is a 386 percent increase.”

Horton’s letter brought a tart response from Baron Adams, 81, a retired electrical engineer from Durham. Adams’ letter, published Saturday, didn’t focus on the size of the Hortons’ tax hike. It focused on the smallness of their projected payment under the previous code.

Adams wrote that he and his wife live off Social Security and a single 401(k) fund and have no pensions. Yet he said he and his wife paid 10 times the state tax the Hortons would pay without the tax changes. “No sympathy is due for the Hortons. They may have been very good at tax avoidance, but it seems they are going to have to pay a bit more of their fair share now. So, tell me, what’s wrong with that?”

Horton, a retired computer engineer from Minnesota, said in a phone interview that he didn’t object to paying more. In fact, he was sheepish about calculating his 2013 return and finding he owed nothing except a $42 use tax after he voluntary disclosed purchases he had made online that didn’t include sales tax. “I thought, we ought to pay something,” Horton said. But after looking at his projected tax bill for 2014, he said, “Well, they took care of that.”

Both Horton and Adams are right. Seniors shouldn’t be subject to a huge tax increase, and everyone should pay their fair share.

That balance is way out of whack. Between the two letters came a report that Duke Energy – which announced a $2.7 billion profit in 2013 – paid no federal income taxes from 2008 to 2012. Another 25 companies in the Fortune 500 also got through the period paying no federal income taxes, according to the report from the Citizens for Tax Justice and the Institute on Taxation and Economic Policy. A Duke Energy spokesman said the utility’s tax bill “was lowered by bonus depreciation rules, temporarily put in place as a part of the 2009 federal stimulus to help create jobs.”

While middle-income taxpayers dispute who should pay what, the nation’s highest earners and high-revenue companies aren’t paying their fair share or, in some cases, any share. What’s needed is a simpler tax system that collects enough revenue to meet the needs of a state and nation while fairly distributing the tax burden by eliminating excessive deductions and raising taxes on the wealthy.