The new legislative leadership is ready to go boldly where others have feared to tread — into the hazardous, murky arena of tax reform. Unfortunately, the Republicans running the N.C. General Assembly aren't planning reform, they're planning revolution.
GOP leaders say they want to abolish the state income tax, both individual and corporate. They would replace the tax that brings in the majority of the state's revenue with a broad-based sales tax on everything, including currently untaxed services and food. Eliminating the state sales tax on food was one of the signature achievements of the legislature during the 1990s. Then Rep., now Judge Milton Fitch Jr. of Wilson led the fight to abolish the sales tax on food. The sensible argument was that food is a necessity, and for low-income residents, the food tax is a heavy and unequal burden. Eliminating the tax on groceries (residents pay only the 2 percent local sales tax at the supermarket) gave an instant boost in disposable income to the poor.
Now legislative leaders want to abandon that approach, which helped those in need throughout the state. Not only would they re-impose the state sales tax on food, they would raise the total sales tax rate from 6.75 percent to more than 8 percent. This hike in the sales tax rate is necessary to replace revenue from their goal of eliminating the income tax, which they argue is too high. N.C. rates are higher than most neighboring states, and GOP legislators say that hurts economic development. But a higher sales tax hurts the economy by discouraging purchases of all kinds.
What they are truly proposing is a massive shift of the burden of financing state government from the more able to the less able. The sales tax is widely recognized as a regressive tax: Its burden lies heavier on the poor, who spend a larger portion of their income buying the necessities of life. The state income tax is only slightly progressive (higher rates for higher earners), but it at least places its burden more equitably on the better off. Only a handful of states go without an income tax, and for good reason. The income tax applies directly to earnings, taxing people in proportion to their earnings. The sales tax may seem equal, but it shifts tax burden to the lower-income, who will pay a far higher portion of their income on taxes than will higher-income earners.
With comfortable majorities in the Senate and House and one of their own in the Governor's Mansion, Republicans might be able to get what they want. North Carolinians, especially those who are not well off, had better hope that cooler heads, such as Gov. Pat McCrory, will prevail. Reform the income tax. Make it simpler and fairer for all. Reduce rates incrementally if at all possible. But don't crush struggling workers with the burden of supporting a disproportionate share of state government expenses.