Significant Tax Reform Likely to be Ugly and Unproductive

by Tom Campbell

The drumbeat for tax reform in 2013 is growing louder with each passing day, but ask those beating the drums what they mean by reform and you get very different answers.

For some, tax reform means closing loopholes; others think it is dramatically cutting or even eliminating personal and/or corporate income taxes. Some advocate the taxing of services. But there is one common theme, once articulated by the late Louisiana Senator Russell Long: “Don’t tax him, don’t tax me. Tax that fellow behind the tree.” Everyone wants to maintain or even reduce the amount they pay, shifting taxes to someone else.

We’ve had many blue ribbon studies on the subject but none of them accomplished much. When you ask the wrong questions you always get the wrong answers.  These are serious decisions that require our best thinking and we grow concerned when we hear, as we have recently heard, politicians arbitrarily say they are going to cut personal income taxes by one-half and eliminate corporate income taxes altogether. Perhaps that is the right thing to do but it is a decision to be made only after careful deliberation of our overall tax philosophy.

There is a growing sentiment on both the national and state levels that we should eliminate the income tax and move to a consumption or use tax. Personal and corporate income taxes account for roughly 55 percent of the almost 20 billion dollars North Carolina receives in General Fund revenues. If we do keep the income tax should it contribute 55 percent of the total revenue or should it be less? Sales and use taxes account for 27 percent, franchise taxes add another 3 percent and almost 10 percent consists of licenses and other fees. What is the right mix for these categories? We should also be asking whether we want to continue to mirror federal tax codes or, as some propose, should we uncouple them to reflect our own philosophy?

Governor McCrory has said he wants to close the loopholes or “tax expenditures,” adding, “Let me send all of you a message because this is not going to be an easy battle with an easy solution. It’s going to step on everyone’s toes a little bit.” Those loopholes are expenditures estimated to amount to 9 billion dollars, with about half of that amount coming from standard and itemized income tax deductions and exemptions on income tax, government retirement income, prescription drugs, sales taxes on groceries and the like. They benefit most every man, woman and child. The rest will affect business and special interest groups who have already hired an army of lobbyists and are geared up to preserve and protect their positions.

My former boss and mentor, the late State Treasurer Harlan Boyles, speculated that the only way significant reforms would be accomplished was to deputize a select group to craft new tax codes and then bring the plan to both houses of the legislature for a straight up or down vote, meaning no amendments or changes could be made, something unlikely to happen.

We need significant tax reform. What we may get could be ugly and unproductive. This is a time for statesmen to do the right thing for our state. Any changes could be in place many years.