Senate leaders unveil tax reform proposal

A tax reform proposal finally has made it to committee, something of an accomplishment in itself. In recent years, a number of study commissions have labored over how to remake the state's revenue system, and many bills have been filed. But when state Sens. Dan Clodfelter of Mecklenburg, David Hoyle of Gaston and Clark Jenkins of Edgecombe brought out their proposal Wednesday for the first wholesale restructuring of state taxation since the Depression, every seat in the Finance Committee room was filled and it was standing room only. Clodfelter joked that if the committee charged an exit fee, the state's budget's $500 million hole for next year would be taken care of right then.

All those folks showed up to see what the committee was proposing. What they got was not a bill in the usual form, but a set of three documents -- an explanation of changes to the system, an example of how tax changes would affect different income groups, and a general list of how much money each change would involve. A couple of minor surprises: The proposal did not include elimination of the local sales tax on food; it was removed after a meeting with Senate leaders Wednesday morning. And the proposal did not eliminate the corporate income tax, but would reduce it sharply over two years, from one of the highest rates in the Southeast to 4.5 percent, one of the lowest in the country.

Clodfelter said the Senate Finance Committee co-chairs' proposal represented the first real tax reform since 1933, and asked legislators and the public to understand that past efforts to tinker with taxes simply didn't work. The state has been holding the tax system together "with string and baling wire," he said. "It just doesn't produce what we need" to pay for services in a growing state.

Among other things, he said, the proposal "reduces every major tax rate" on the state's books, broadens the sales tax base by applying it to a greater number of services, eliminates personal tax deductions and turns the deductions for mortgage interest, charitable deductions, children and medical expenses into tax credits. It directs that state personal income taxes be based on the federal formula for adjusted gross incomes, and reduces the three rates for personal income taxes from 7.75, 7 and 6 percent to 7.5 percent, 6.5 percent and 5.25 percent. It would lower the state sales tax rate from the current 4.75 percent to 4 percent (with the local sales tax of 2 percent, the combined rate would go from 6.75 to 6 percent). And it would make the franchise tax apply to all corporations and be based on retained equity. The proposal would produce enough new revenue to meet the $500 hole in the proposed 2009-10 budget as passed by the Senate.

The committee co-chairs asked the public to think about the proposals and, instead of only criticizing what's there, recommended changes they would prefer to the ones outlined by the committee. As Hoyle said following the meeting, there are only three approaches the committee can take: One, "Cut the hell out of the state budget and do some real damage to the state;" two, raise enough money from increased taxes such as the services tax to balance the budget, or three, "We and adopt this plan and have a modern revenue system" that will be less susceptible to changes in the economy.

The co-chairs said they know they'll get a lot of criticism, and they're right. Even before the committee met, Republicans were accusing the Democrats who run the Senate of running a "bait and switch" operation, promising tax reform with lower rates but in fact extending the tax system to cover items not previously taxed and coming up with $600 million in new revenue.

Linda Daves, N.C. Republican Party chair, had this to say:

North Carolina Democrats are trying to run a classic scam on N.C. taxpayers: the bait and switch. Pretend to be reducing taxes by slight increments while at the same time creating new taxes to raise more revenue than ever before. They hope that we will not notice as our overall tax burden is increased by $600 million.

Democrats want to use this crisis to raise taxes and avoid reducing the size of a bloated state government. A crisis is a time for government to cut back and for Democrat leaders to take responsibility for their past mistakes. As unemployment increases by the month and most workers are making less, it is not the time to ask our citizens to pay more. Democrats have poorly managed the tax money we gave them in years past resulting in the current budget crisis. Why would we trust them with a dime more?