No NC income tax, higher sales tax?
by Anna Oakes
A significant reduction of the state income tax -- or elimination altogether -- could be on the agenda for the General Assembly this year.
The 2013 long session of the state legislature does not officially convene until Jan. 30, but on Tuesday, the N.C. Senate and N.C. House Finance committees held a joint meeting in Raleigh at which tax reform was discussed, Republican Sen. Dan Soucek of Boone said.
"It was a good portion of the entire legislature that was at that meeting," Soucek said.
The Senate is taking the lead on tax reform, said Republican Rep. Jonathan Jordan of Jefferson, and Republican Sen. Bob Rucho is heading up the effort.
Soucek and Jordan said Rucho did not discuss specific tax proposals at the meeting earlier this week, instead providing a presentation on the history of the state's tax code. But Rucho has disclosed some proposals of a plan to overhaul the tax code, including eliminating or drastically reducing the state income tax for individuals and corporations. In place of this revenue, the plan would raise the combined state and local sales tax to about 8 percent (the combined state and local sales tax rate is 6.75 percent in most counties now) and broaden the sales tax base to include services.
"(The tax code is) based right now on a manufacturing economy," which no longer accounts for a majority of economic activity in the state, Jordan said. "The taxes we're taking in are very unstable -- up and down."
Rucho's proposal would also end various sales tax exemptions, including one on groceries, and the expansion of the real estate transfer tax and a new business license fee have also been discussed, according to media reports.
The proposals are similar to those put forth in a December 2012 study by the conservative John W. Pope Civitas Institute -- which is funded by the family foundation of Art Pope, who Gov. Pat McCrory recently appointed as deputy state budget director.
The study proposes the repeal of the personal income tax, corporate income tax and franchise tax, to be replaced with revenues from an expanded sales tax base, expanded real estate transfer tax and new business license fee levied on all businesses.
"A proposed consumption-based tax system currently being discussed by state legislative leaders leverages these insights to improve the overall economic incentives in North Carolina," states a brief on the study.
The study has its own website -- http://www.noincometaxnc.org.
Critics of these proposals say that cutting the income tax and increasing the sales tax is a regressive policy that will shift more of the tax burden to low- and moderate-income citizens.
"This tax shift would hit lower-income North Carolinians harder because they tend to spend nearly all (three-quarters) of their earnings on sales-taxable items in order to meet their basic needs. This experience is in great contrast to that of the highest earners who spend a much smaller share (roughly one-sixth) of their earnings on sales-taxable items," said the left-leaning N.C. Justice Center in a Jan. 8 statement.
The Civitas study proposes that "regressivity concerns can be addressed through exemptions of items that account for a greater share of lower-income individuals' budgets, such as groceries and out-of-pocket medical expenses."
Jordan said he would consider voting for the elimination of the income tax if presented as part of a comprehensive tax plan.
"I definitely think it's something we should look at," he said.
Soucek said he supports a plan that is revenue-neutral and fair.
"We have a huge task in front of us," Soucek said. "I don't know if
there's anything more fundamentally important to turning the economy around."
CORRECTION: A previous version of this story incorrectly stated the state sales tax rate as 6.75 percent; 6.75 percent is the combined state and local sales tax rate in most North Carolina counties, including Watauga, which includes the state sales tax rate of 4.75 percent and a 2 percent local sales tax rate. Some counties in the state have local sales tax rates of 2.25 percent.