The State of Things
12:27 pm
Tue June 11, 2013

What Will Happen To North Carolina's Tax Code?

Photo of the State Senate Chamber
Credit Dave DeWitt
Host Frank Stasio talks to a panel of experts about possible changes to the tax code

Benjamin Franklin famously said, "In this world nothing can be said to be certain, except death and taxes."  But in the North Carolina legislature, three competing plans seek to reform the tax code, and the future of these plans is all but certain.  Two bills are waiting in the Senate Finance Committee. One bill passed the House yesterday and will move to the Senate.

The House plan and Senator Bob Rucho's plan will both reduce North Carolina's net tax revenue by one billion dollars in the coming years.  Only the bipartisan Senate tax plan is revenue neutral.

But can North Carolina afford to lose this tax revenue?  Experts in the state present a range of differing opinions. 

"We need more revenue in this state, not less...  We have needs that are not being met in the area of roads, in the area of mental health, in the area of schools.  And the state is growing economically.  And so it needs more infrastructure spending and more spending of various kinds to deal with more needs," said economist Stanley Black in an interview with the State of Things.  Black is an Emeritus Professor of Economics at University of North Carolina-Chapel Hill. 

Republican supporters of the bill say that North Carolina has the highest income and corporate taxes in the Southeast.  These rates may drive potential businesses from the state.  Each bill seeks to do away with the progressive income tax in favor of a flat tax. 

"A flat tax is everybody pays a certain percentage of their income.  So, loosely speaking, if I made twice as much money as you did...then I would pay twice as much in tax," said John Hood, President of the John Locke Foundation

Hood goes onto explain that some provisions of the bills do offset the burden on lower income households.

"The way you avoid regressivity problems with something like a flat tax is you use standard deductions, exemptions, or credits to shield some of the income of households," Hood explained.   

In fact, the House bill will double the standard deduction and the child tax credit.  But critics of the flat tax say that it challenges notions of progressivity. 

"I think it's important to sustain a sense of progressivity in the tax code.  So flattening the income tax gives me pause.  I think there's a value to our society to have those of greater means bear a somewhat larger share," said Ferrel Guillory, a professor in the Practice of Journalism and Director of the Program of Public Life at University of North Carolina Chapel Hill.

The bills would also expand the sales tax to  services that are currently untaxed in the state.  While the House tax plan includes some services, such as as maintenance, repair, and installation services, the Senate tax plan sponsored by Bob Rucho is further reaching, including new taxes on  food and prescription drugs.

"The Rucho plan basically goes whole hog.  Anywhere from 130 to 160 new services would be taxed," said Laura Leslie, Capital Bureau Chief of WRAL. 

The State of Things also interviewed Roby Sawyers, a Professor in the Poole College of Management at North Carolina State University.  Sawyers testified in front of the Senate Finance Committee regarding his analysis of Senator Rucho's bill. 

"I really prefer to concentrate on the similarities between the plans rather than the differences.  I think all attempt to do the same basic thing, and that's to reduce our individual income tax rate, reduce the corporate tax rate, and expand the sales tax.  Now devil's in the details with respect to those specific differences.  But they all attempt to do the same thing, and that's what accountants, economists, and others have been calling for for a long time," said Sawyers on The State of Things. 

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