Friday, May 31, 2013

Tax reform is barreling down the wrong track

North Carolina's tax system is antiquated, unequal and unfair and has been in need of revision for decades. But the proposals being offered by the Republican majority in the General Assembly do little to make the system more fair and reasonable.

Expanding the sales tax is sensible because far more of the economy is based on services than on products, compared to when the sales tax originated in the 1930s. But the new proposals fail to make the sales tax fairer while expanding the number of transactions subject to the tax. Charging the sales tax for food and prescription medicines is a step backward that will have a greater impact on those least able to pay. The elimination of the tax on food was a significant victory more than a decade ago, and reneging on this decision turns back the clock on low- and middle-income residents.

In exchange for corralling grocery purchases and services for taxation, the tax bill would barely nudge the sales tax downward — dropping the rate only from 6.75 to 6.5 percent. That's not enough for consumers to notice — just 25 cents on a $100 purchase while the tax would go up by $4 (the food tax is now 2 percent) on $100 worth of groceries.

Legislators seem determined to lower, or even eliminate the state income tax. Wiser use of incentives and elimination of corporate tax loopholes could bring down the income tax rate, but Republican legislators need to disabuse themselves of the notion that the income tax is evil, in and of itself. The income tax is fundamentally fair and effective if it limits exceptions to the tax code. Instead of bribing corporations to move to or expand in North Carolina, the state could lower its corporate tax rate to treat all corporate citizens equally.

A progressive income tax makes the reasonable assumption that those most able to pay would pay a higher rate. This concept can even be applied to the so-called "flat tax" if the law provides for a tax exemption on the first $20,000 (for example) of income. In this example, a 5 percent rate would apply to all tax returns, but a family with $20,000 in income would pay no taxes while a family with $220,000 in income would pay $1,000 in taxes. The rate and the amount of income exempted from taxation can be adjusted to meet the needs of the state.

Anti-tax legislators (and constituents) need to realize that state taxes go toward good and useful projects — public education, universities, county health services and social services, highways, law enforcement, public safety, etc. These are services that the state residents want for themselves and their neighbors. The task of the legislature is not to starve these useful and desirable services in the name of low taxation but to ensure that funds are raised fairly, allocated wisely and spent responsibly. Instead of "How can we cut our friends' tax bills?" the question should be "What is the fairest, best and most efficient means of raising the funds needed for the services our constituents want and expect?"

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