Tax Reform Not on Menu for New State Leadership

An article in today’s Greensboro News & Recordsuggests that the new GOP leadership in North Carolina’s General Assembly doesn’t think now is the right time to tackle any significant reform of NC’s tax structure.

Democrats fell short with a reform package in 2009 that Republicans called a tax increase in disguise. Now the GOP is in control of both chambers of the Legislature for the first time in more than a century, starting in January. Their leaders don’t dismiss the reform concept, but won’t tackle the politically sensitive issue for now.

Their top priorities are cutting unnecessary state spending and getting the economy back on track. While they’ve vowed to let a pair of temporary tax increases expire and want to reduce some tax rates, they’re don’t want to touch broader issues of balancing the tax code until the economy roars again and other campaign platform items are addressed.

“I’m not sure reforming the tax system is something that is appropriate at this time, simply because of the unsettled state of the economy,” said Sen. Phil Berger, R-Rockingham, who is expected to be elected Senate president pro tempore in January. “The people of North Carolina elected us, I believe, to get the state’s fiscal house in order.”

The most significant change in the oft-discussed tax reform plan is introducing a sales tax on services. Currently, the state applies the sales tax to only a few services. Expanding the scope of economic activity that is taxed, advocates say, would allow the sales tax rate to be lowered and be more reflective of the modern economy that includes such a high amount of services being purchased.  The tax base for income taxes and corporate taxes could also be expanded by eliminating exemptions, deductions and credits.

Politically, such reform will be very difficult because well-funded special interest groups exist to protect most of these exemptions and credits – and bet that countless service sectors will deploy lobbyists to fight to keep the sales tax from being applied to their industry.