MEDIA CONTACT: Dr. Mike Walden, 919.515.4671 or michael_walden@ncsu.edu

YOU DECIDE: Is it time to shake up state's taxes?

By Dr. Mike Walden
North Carolina Cooperative Extension Service

Former U.S. Treasury Secretary Paul O'Neill, New Mexico Gov. Bill Richardson, publisher Steve Forbes, former Virginia Gov. Mark Warner and a former prime minister of Russia were among the speakers at the recent 2006 Emerging Issues Forum at North Carolina State University.

The topic was taxes, and whether our state's tax system needs a total re-make.

The issue focused not on increasing tax rates , but on a more fundamental, essential question: Does North Carolina have the right tax system for the 21st century, a system that will provide adequate public revenues while also benefiting the state economy?

The diverse group of speakers from varying viewpoints drew several conclusions that centered on three themes: the tax base, tax rates and flexibility for local governments.

The tax base is the financial measure on which taxes are paid. For example, retail sales are the tax base for the sales tax, income for the income tax and property value for the property tax.

A recurring concern expressed at the forum was whether the tax base for North Carolina's major taxes is keeping up with the expanding and changing economy. A good example is the sales tax.

The state sales tax is primarily paid only on the retail sales of goods, not on services. So consumers pay a sales tax when a lawnmower is bought, but not when a contract is signed with a lawn service.

This economic base made sense 80 years ago — when the sales tax was developed — and when the service sector was virtually non-existent. But today the service sector is the economy's biggest component and is growing faster than the goods sector. This means the sales tax is applied to a smaller and smaller slice of the economic pie. Also, to keep sales tax revenues comparable to the growing economy puts pressure on legislators to increase the sales tax rate.

A solution, much talked about at the forum, would be to apply the sales tax to all retail transactions. This would allow the sales tax rate to be cut, maybe by as much as 50 percent, but just as important, would keep the sales tax base growing in line with the economy.

Tax rates on both the North Carolina individual income and corporate income taxes received considerable attention at the conference.

The issue is whether North Carolina's relatively high corporate income tax rate and high individual income tax rate on upper-income households detract some businesses and wealthy households from locating in the state.

Some studies suggest this may be the case, and that lower-income tax rates may actually pay for themselves by enticing more wealth to North Carolina. However, this view isn't universally held, and this issue will continue to be the subject of intense debate.

A companion issue is whether North Carolina's income tax would be fairer and more efficient if many credits, deductions and exemptions in the tax code were eliminated in exchange for reducing income tax rates across the board. To many this seems like a good idea, but support can quickly crumble when taxpayers realize what they're losing. One solution might be to allow individual taxpayers to choose between the current system and a new system with lower rates but fewer exclusions.

Local governments were not forgotten at the forum, and the message heard consistently from them is that they need more taxing options and flexibility. The taxes local North Carolina governments can use are largely controlled by the state General Assembly. Many local governments would like the ability to explore new taxing methods more consistent with today's economy.

Our economy changes much more rapidly than the tax system, and at some point citizens may realize a large disconnect between the two. Are we at such a point in North Carolina?

This year's Emerging Issues Forum asked that question; but together, in numerous discussions and debates across the state, we will decide.

-30-

Dr. Mike Walden is a William Neal Reynolds Professor and extension
economist in the Department of Agricultural and Resource Economics of North
Carolina State University's College of Agriculture and Life Sciences. He
teaches and writes on personal finance, economic outlook and public policy.
His You Decide column is provided every two weeks by the Department of
Communication Services. Earlier You Decide columns are available on the Web
at http://www.cals.ncsu.edu/agcomm/writing/walden/decide.htm
Related audio files are at
http://www.ces.ncsu.edu/depts/agcomm/writing/walden/index.html