Guarding the henhouse, feeding the beast and real tax reform

by Tom Campbell, Executive Producer and Moderator, NC SPIN, August 8, 2014.

North Carolina legislators have been to school in the complications and frustrations resulting from tax policy changes. Some of this session’s conflicts were a result of changes made to the state’s tax codes in 2013. Three lessons can be learned: you must keep the foxes out of the henhouse, you must feed the beast, and real reforms must simplify and be uniform, understandable and enforceable.

Give them credit. North Carolina’s tax codes are hopelessly in need of change. Through the years they have been amended and layered with tax preferences, exceptions and loopholes. The 2013 session was the first to seriously attempt tax reform.

Of more than 300 existing special tax breaks lawmakers chose 48 to sunset or cease. This initial step, they proclaimed, would begin meaningful reform. Experienced observers understood they were about to learn lesson one about keeping the foxes out of the henhouse.

The late State Treasurer Harlan Boyles, long an advocate for tax reform, was also an experienced realist. He knew the only way to achieve comprehensive tax reform was to begin with high-level buy-ins from lawmakers and the governor, establish an experienced task force, swear members to secrecy, work behind closed doors, then, at the conclusion of their work and with the support of legislative leadership, bring their work product to the floor of the legislature with the understanding it could be passed up or down, but not amended. Otherwise tax reform would die a death by a thousand cuts, as one special interest group after another fought for their best interests. We are witnessing that today.

We aren’t finished with the fight to preserve film tax and historic preservation tax credits, just two of the “foxes” seeking access to the proverbial henhouse. Tax reform would have been easier if all tax breaks were eliminated at one time and all “foxes” were equally clambering for access.

The 2013 tax changes cut income taxes, especially for corporations and higher-earning individuals. Using what were considered reliable, conservative projections legislators built a biennial budget based on declining state revenues resulting from those tax cuts, but also factoring in revenue growth from an improved economy. But projections aren’t reality. State revenues declines were some $200 million more than anticipated, attributed to less than expected personal income growth. Further, there is concern next year’s revenue deficits will grow even larger with the second round of tax cuts. Those concerns impacted this year’s budget deliberations. Lesson two: You must feed the beast of state government.

The third lesson is that the goal of tax reform is to simplify, clarify and make tax codes uniform. We have this romantic vision that tax policy should be fair, with no one having any more or less advantage and without the state picking winners and losers. Laws should be easy to understand as well as efficient to collect and enforce. The 2013 tax reforms nibbled around the edges a little but fell short of the goal.

This reminds us of the proverb about a person with money meeting a person with experience. At the end, the person with experience leaves with money and the person with money leaves with experience.

The state has less money, certain taxpayers have more, and legislators have more experience. The question is what lawmakers will do with that newly gained experience.