House offers broad tax cut

By John Hood | Jun 06, 2013

RALEIGH — If reforming North Carolina’s tax code were easy, one of the many tax-reform efforts of the past 20 years would have succeeded. Didn’t happen.

There isn’t just one obstacle to tax reform. There are many. For starters, at the macro level there is a lack of political consensus about the goal. Is it to raise additional revenue for government? To foster economic growth? To reduce complexity? While some politicians espouse them all, these goals often conflict.

At the micro level, every special deduction or loophole has a special-interest defender. Take the example of the income-tax deduction for mortgage insurance. It disproportionately benefits wealthy taxpayers who invest their savings in large houses rather than securities or productive capital. Most North Carolina households don’t itemize, which means they can’t claim the interest deduction, and most of the 23 percent of N.C. households who do take the deduction reduce their tax bill only slightly.

Clearly, most North Carolinians would pay lower taxes under a reform that capped or eliminated the mortgage deduction in exchange for lower tax rates. The result would be higher economic growth and no appreciable change in homeownership (the mortgage-interest deduction mostly affects the size of homes bought by wealthy households). Yet the real-estate lobby has fended off this common-sense reform for decades by skillful lobbying and public relations.

Yet another obstacle to tax reform is misinformation. Many journalists, activists, and self-styled experts do an atrocious job of explaining tax issues to the public. For example, they fail to distinguish between tax deductions or exemptions that pick favorites or reward special interests (e.g., mortgage interest) and tax deductions or exemptions that are necessary to define the tax base properly so government doesn’t pick favorites (e.g., deductions for the cost of generating future income).

As the North Carolina Senate and House approached the task of reforming the state tax code, they faced these and other obstacles. The two chambers responded differently. While agreeing on the macro goals – economic growth and simplification – they disagreed at the micro level. The Senate decided not just to take on special-interest preferences in the income tax but also to broaden the sales-tax base dramatically, thus adding dozens of other interest groups to the coalition opposing its plan. The House decided to do much less to the sales-tax base, thus accepting somewhat-higher marginal tax rates on savings and investment in order to improve its chances of running the legislative gauntlet and getting a bill enacted.

Another way the two tax bills differ is how they affect households of low-to-moderate incomes. According to a tax calculator attached to the Senate plan, it has the effect of raising the overall state tax bill for many households at or below $40,000 in income, particularly those with multiple children. This effect occurs primarily because of the Senate’s expansion of sales tax to many currently untaxed goods and services, including food.

The House tax bill avoids this problem and thus produces broader net tax relief. According to a just-released analysis of the bill by the legislature’s nonpartisan fiscal staff, more than 80 percent of North Carolina households would pay less state tax under the House plan than they currently do, including all households below $40,000 in income, all singles, and all heads of households. Only a small number of married couples would see a net tax increase, ranging from $9 to $43 a year depending on income. Even for them, the benefits of simpler taxation and faster economic growth would more than offset their small cost.

Gov. Pat McCrory has already indicated his preference for the House approach, which would result in a 5.9 percent flat tax and a tax code friendlier to investment and job creation. Admittedly, the road to successful tax reform remains littered with political obstacles. Both Senate and House leaders deserve praise for daring to traverse it. Now they just need to work together to get to the destination — and North Carolina taxpayers need to root them on.


Hood is president of the John Locke Foundation, which has just published First In Freedom: Transforming Ideas into Consequences for North Carolina. It is available at JohnLockeStore.com.

Comments (1)
Posted by: Charles Zimmerman | Jun 11, 2013 10:52

       I don't trust anything John Hood has to say. His opinions have not been reflective of John Locke's very liberal philosophy whatsoever.

       "Incentives" whereby public funds are used to subsidize a buisness to move or build or expand to North Carolina are nothing more than bribery that results in other buisnesses and the public giving an advantage to the buisness "incentivised". It is just plain wrong.

        "We the people" alreddy have a flat tax on consumables. This tax should not cover food nor health care nor "entitlements".

         Just as people in general earn in proportion to their abilities, so too should they be taxed in a progressive proportional manner. I'd start at the point of poverty and tax at a rate of .1% for every $10,000.00 afterwards whereby $1,000,000.00 of income would be taxed at a rate of 10%.(or a percantage that is adequate to meet needs, but still in set proportion) No deductions whatsoever. None.

            Same for federal.

            Three times set rate for inheritance.

             As it is the stated goal of OUR secular republic to equally protect its citizens against oppression while equally protecting their civil rights, accumulations of wealth/power must be prevented in order for all to have equal opportunity of Liberty.

           I'd fine persons(stockholders included) that caused OUR jobs to be outsourced to a foreign country $1,000,000.00 per job lost. Confiscate all funds from tax havens. Bring treason charges against any and all who aided and abbetted against US by any such action.

            I'd cut defense spending by 10% with the goal of eliminating the need for a "standing army", while paying whatever it costs to adequately care for, educate, employ, etc, those that WE put in harms way, especially as much was unneccessary to begin with.

            I'd require every 10 year old to be "trained to arms". A 5 shot 22 caliber bolt-action rifle would work and satisfy the "Well regulated militia being neccessary to the security of a free State"... I'd further require them to care for a pig to learn about animal husbandry. I'd encourage 4-H. which builds character by causing kids from all backgrounds to compete while working together.

            I'd charge user fees based on miles traveled for everyone above poverty line not eligible for entitlements.

            I'd increase public education funding greatly while banning/eliminating any public money's used for any charter type schools, especially religious schools. James Madison"s Remonstrance and Remembrance Against Religious Assessments in Favour of the Teachers of the Christian Religion showed conclusively why no public money should be spent on religious opinion.

            Education is the key to attracting, holding, building or creating new buisness to North Carolina. Bribery is not. It makes criminals out of both the giver and the receiver.

 

           Chuck Zimmerman



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