Closing the Multi-Billion Dollar Deficit

Perhaps legislators should take a hard look at tax incentives when looking for ways to close the budget gap next year.  North Carolina forfeited approximately $6 billion in tax revenue in fiscal year 2009-2010.

Back in December 2009, the Policy Analysis and Statistics Division of state government released a report on tax expenditures for the fiscal year 2009-2010.  The report can be read in full here.  Tax expenditures are defined as an “exemption, exclusion, deduction, allowance, credit, refund, preferential tax rate or other device that reduces the amount of tax revenue which otherwise would be collected.”  For example, the multi-million dollar incentives given to film production companies are tax expenditures.  So is the child income tax credit.

Legislators and the electorate may agree that some of these tax credits resulting in forfeited revenue are worthwhile.  For example, perhaps easing the tax burden for families by exempting food for home consumption from sales and use taxes, which North Carolina currently does, is good policy.  However, a vigorous debate can be had over whether film incentives are worth the lost revenue.  Instead of raising taxes, promoting a more equitable tax structure by eliminating preferential tax treatment may succeed in raising revenue if such a move is deemed necessary next session.  Below are some of the current sales and use tax expenditures and their estimated revenue costs:

• $36.9 million for telephone equipment
• $7.8 million for commercial logging machinery
• $12.5 million for cable service broadcast equipment
• $14 million for materials used by a major recycling facility
• $3.7 million for the lease or rental of films for exhibition
• $126.6 million for packaging items (i.e. wrapping paper)

The next General Assembly might also consider leveling the playing field by eliminating many of the tax expenditures while also lowering sales and use taxes or individual and corporate income taxes.  Lowering overall tax rates would make North Carolina generally more business friendly while a more equitable tax structure would take the politics (read: corruption) out of promoting economic growth.