As Thomas has written, tax reform is a long-overdue priority for North Carolina policymakers. It is particularly vital for Democrats, since our state’s unreliable revenue system periodically leaves the pool of education funding dry. One promising reform proposal has already been introduced this session. In this post, I’ll sketch the outlines of another plan that focuses especially on rebalancing our revenue sources.
Problems in our tax code go beyond the commonplace observation that it is based on a textiles-and-tobacco economy. More important is that deficiencies in the sales and corporate taxes leave us overly dependent on individual income tax receipts. The sales tax is a toxic hybrid of a high rate and a narrow, regressive base. Corporate taxes are similarly distorted, with a “separate reporting” standard that allows multi-state corporations to shift profits to affiliates in lower-tax states like Delaware. (Page 10.) Consequently, we rely more on the individual income tax than most other states. In this regard, the progressivity of the income tax works against progressive priorities. High earners’ incomes are volatile, so we see huge percentage-declines in revenue during downturns, forcing us to contemplate “generational” cuts to education.
To solve this problem, we need to relieve the income tax of some of the burden. The sales tax base should be broadened to encompass many–but not too many–more of the services that other states tax. We also need much more business tax revenue; currently, we are tied for last in the nation in terms of business tax revenue relative to Gross State Product. (Page 18.) The place to start is requiring multi-state corporations to pay taxes on all their profits, to end the practice of legal tax evasion. Before taking on corporate loopholes, we should at least publish cost-benefit analyses of all existing ones to judge whether they are worth the price. Finally, the state Earned Income Tax Credit should be doubled, if not tripled. One in four North Carolina children lives in poverty. This is a moral scandal, and expanding the EITC would constitute a small step toward putting it to an end.