Column: Legislature won't rush to tackle tax reform

Published 12:00 am Wednesday, December 27, 2006

By Scott Mooneyham

Capitol Press Association

RALEIGH — When it comes to the latest effort to re-examine North Carolina’s tax structure, forgive the yawn.

Unlike most sane people, I do find the subject interesting. I just believe the results are predictable.

The latest review comes from a legislative study commission dubbed the State and Local Fiscal Modernization Study Commission. It is the third government panel to look at state finance reform since Gov. Mike Easley took office in 2001.

The previous efforts, including proposals from an Easley-appointed panel, resulted in some playing around at the edges — tax loophole tightening and other marginal changes.

Now comes the legislature’s bite at the apple.

Not surprisingly, the legislative panel has heard plenty of banter about placing a sales tax on services, taxing things like accounting and car repairs in the same way that goods are now taxed.

The subject always accompanies any of these discussions, and has recently been a favorite topic of the Institute for Emerging Issues at N.C. State University.

The reason: Some economists believe our current tax system is outdated, that a sales tax placed only on goods fails to keep pace with an economy that is now largely service-driven.

But economist talk and legislative action are quite different.

Any real movement in this direction would require some serious political heavy lifting. A substantial revision of the tax structure — even a “revenue neutral” solution that lowered the overall sales tax rate while taxing services like accounting and legal work — would call for some leadership and salesmanship.

Easley, while expressing some interest in the subject early in his tenure, has lately said that he doesn’t believe there is enough public support to justify any change. (Translation: He doesn’t want to butt heads with the powerful financial services and lawyer lobbies that would oppose any service tax.)

Also, not all economists believe the state’s tax structure is in such dire shape.

Over the past decade, the relative percentages pulled in the various state taxes haven’t changed much.

According to figures from the state controller’s office, the sales tax today accounts for 27.4 percent of total state revenue, compared to 28.4 percent in 1997. The percentage of revenue generated by individual income tax during the same period continued to increase slightly, from 48.6 percent to 52.6 percent, while corporate and franchise taxes declined slightly.

That relative stability, though, did occur while lawmakers increased sales tax rates. Nonetheless, the numbers hardly make the case for the kind of crisis usually needed to cause legislators to get behind a monumental and difficult public policy change.

Instead, this commission is likely to use its examination to recommend a change that some legislators have been discussing for a while — removing the Medicaid burden from counties.

In exchange, expect lawmakers to take back from the counties revenue generating by a half penny of the sales tax while giving them the authority to raise the local portion by another half penny.

Not exactly earthshaking “fiscal modernization.”

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Scott Mooneyham is a columnist for Capitol Press Association.

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