Save us from a boost in the sales tax

Give Gov. Bev Perdue credit, as the News & Observer gave her this morning, for opening up the doors and file drawers of state government to more public scrutiny. But when it comes to budgeting, Perdue seems to be still trying to make the numbers add up.

Earlier this week, Perdue announced support for a one-cent increase in the state sales tax, raising the rate on retail sales to 7.75 percent. If that weren't enough of a surprise, Perdue also proposed raising the state income tax rate for high-income taxpayers, increasing the tax on wine and beer, and expanding the sales tax, to some services, including cosmetic surgery and limousines. Earlier in this legislative session, there was talk of a sales tax reform that would expand the tax to common services, such as lawn care, and reducing the overall rate, perhaps to around 5 or 6 percent.

Raising the sales tax is the wrong strategy. If Perdue's one-cent increase is adopted, North Carolina's tax will approach the sales tax levels of states without an income tax, which rely on sales taxes for most of their revenue. The state would be far wiser to expand the sales tax and reduce the rate. Perdue's selective and timid expansion to limousines and cosmetic surgery is hardly an effective tax policy. If the sales tax were applied to all services, including advertising, accounting fees, legal fees, lawn care, car maintenance, home repairs, etc., the rate could be significantly reduced while still collecting the same amount of money.

And North Carolina, despite this downturn, should be collecting plenty of money. The state does face a budget deficit, which might be as large as $4 billion or maybe as little as $1.5 billion, depending on how you count it. Perdue and legislative leaders aren't counting the $1 billion-plus in federal stimulus money the state expects to receive. This deficit is partly the result of spending commitments legislators made in the past few years. Last year, you might remember, legislators decided to borrow money for a variety of construction projects, which leaders said would boost the economy and inoculate North Carolina against a looming downturn. That worked well, didn't it?

Legislators should start their budgeting by putting an immediate stop to all borrowing and halting construction projects, including the new dental school at ECU and the expansion of the dental school at UNC. Better to wait longer for a dental appointment than to spend money you don't have. After halting capital projects, legislators should look for efficiencies and should eliminate programs that are no longer necessary or are ineffective. Only then should taxes be addressed. Legislators should look at ways of making taxes fairer and more effective, not simply looking for ways to increase revenue. North Carolina's taxes on wine and beer, for example, are already among the highest in the region. Expanding the sales tax to services and lowering the rate would benefit most consumers and put state revenues on a sounder basis.

But raising the sales tax by another penny? Perdue is on the wrong track.