North Carolina lawmakers are expected to mull sweeping tax reform, which could see sales taxes raised across the board, the institution of a business-to-business licensing fee and the elimination or reduction of corporate and personal income taxes.
The issue, expected to received a good deal of discussion during this session of the N.C. General Assembly, was broached during a recent public forum locally. District 10 Sen. Brent Jackson (R-Sampson), joined by other legislators, gave an explanation of a plan floating around Raleigh following a query by local business owner Kermit Williamson.
North Carolina’s taxing authority has been described by some as “antiquated,” an assessment with which Williamson agreed. He asked lawmakers for their reaction on a proposal to do away with individual income tax and increasing the state sales tax.
Jackson said a stakeholders meeting was held to discuss a plan proposed by Sen. Bob Rucho (R-Mecklenburg), with mostly state agriculture representatives, from “small growers to billion-dollar outfits,” in attendance.
“This is all talk, so keep that in mind,” said Jackson. “There is nothing that has been put in writing. This is all theories. They have used economists and accounting firms to tell them the best way to (do this). North Carolina’s tax code is one of the worst in the Southeast. It’s just horrible. It’s very complicated.”
The proposal would borrow from tax process in other states, including Tennessee and South Carolina, in an effort to adopt a system in which all corporate and personal income tax would be eliminated toward a more even broad-based tax rate. A revenue-neutral plan is the aim, he noted.
“We need basically $17.5 billion a year to make this state float. That is actual tax dollars needed to keep this state, at its current spending level, floating,” Jackson said.
In order to get that $17.5 billion, a sales tax bump would be implemented, according to the tentative plan.
“They are talking about 8.05 percent sales tax on everything,” said Jackson. “Haircuts, beauticians, heating and air, repairmen, labor, auto mechanics, everything.”
The 8.05 percent sales tax is estimated to net around $14 billion.
“All businesses would be tax-exempt; this is a consumption tax,” Jackson said. “So if I was to sell (someone) a watermelon at my farm and he was consuming it, I’d charge him tax. But if I took a load down to Farmer’s Hardware and sold them to Kermit, and he was going to re-sell them, he would charge the customer the tax. I wouldn’t. Business to business, no tax. To compensate for that $3.5 billion (shortfall), there would be a business licensing fee.”
That is where the “hiccup” comes in, the senator said.
The plan proposes to base the fee on the net worth of a company, a minimum of $500 for all businesses. For larger companies, it could be 1 percent of the net worth of the company to be taxed each year.
“My argument is we’ve created net worth over the years. That’s the goal of America, is to create wealth and pass it on to the next generation. That is the American dream,” said Jackson. “When you’re doing that, you’ve already paid taxes on that net worth one time. You’re paying it on property taxes again every year, on your equipment and your assets. That’s where the rub comes.”
The agriculture representatives at the recent stakeholders meeting did not take to the licensing fee.
“They didn’t like that idea either, but there was good discussion,” said Jackson, commending Rucho for the plan.
Need for tax reform
Tax reform in one way or another has been discussed for years, but has not come to fruition.
“This will be the eighth time in recent years someone has tried to bring up tax reform in North Carolina,” said Jackson, “and the first seven failed and actually never even got off the ground. I’m not for sure this one is.”
For Rucho’s plan, Jackson said he suggested nixing the business licensing fee and replacing it with a 1 percent sales tax on everything business to business.
“One percent wouldn’t kill a farming operation,” the senator said. “You’d still tax everything and see if that would make up that $3.5-$4 billion we’re going to be short.”
Those numbers are expected to be crunched. Jackson said he has heard the plan is not getting positive reviews in the N.C. House, and even some in the Senate. Rep. William Brisson, whose 22nd district covers most of Sampson, said he was not a proponent of such a plan that would eliminate personal and corporate income tax in favor of sales taxes on the general population, many of which would be hit hard just as the economy shows signs of recovery.
“While Brent was listening to his senators, I heard the governor, and he doesn’t like it that well,” said Brisson. “It has been ongoing. We started calling it a user’s tax about three years ago. The problem I’m seeing — and I think at the end of the day, what will happen — is it’s more impact on the middle class and the poor.”
Brisson pointed out that middle class and poor populations tend to lean toward utilizing service businesses, getting things repaired rather than replacing them. Jackson said there has already been talk of a implementing a possible tax refund for those at or below a certain poverty level. The senator stressed everything was in the early stages, with nothing concrete yet.
“Well maybe they can sell it on that,” Brisson said. “Until they have it on paper, I’m not going to support it,” said Brisson. “I still say a user’s tax will always be a more direct impact on the middle class and the poor folks. Until they get that squared away, I’m not going to support the Senate.”
Gov. Pat McCrory said last week that he’s still examining several tax overhaul options, and had not decided which one he’ll choose. The governor said the idea of eliminating corporate and personal income taxes remains on the table, but a top budget adviser for McCrory said he had “great concerns” about a pitch by Senate Republicans to abolish income taxes.
McCrory previously said he would like to see corporate and individual income tax rates fall to levels competitive with neighboring states.
“This is the problem: We’ve got to do something,” Jackson said. “There’s got to be something done, because the way we collect taxes has changed. We used to manufacture things in this state. Agriculture is one of the last few things (North Carolina has that is) manufacturing. We’ve gone to a service industry, and very few of these services are being taxed.”
Brisson said the sales tax collections in the state have fluctuated in recent years. One cent sales tax now translates to much less than it did five years ago.
“Before we went into the recession, I’ve seen 1 cent sales tax go as high as $1.6 billion,” said Brisson. “It’s gone down. It’s picking back up some, but it’s about $1.1 billion in revenues produced for the state. When you have 6 cent (sales tax rate), and you lose half a billion dollars with the economy dropping down, that makes a lot of difference.”
Legislators also alluded to Internet sales that could be taxed in the future. Jackson said some action was needed, as the status quo would limit the sustainability of the state’s economy.
House Speaker Thom Tillis (R-Mecklenburg) has stressed the need to make progress on tax reform this year. Tillis said he wants to eliminate corporate income taxes and reduce individual income tax rates. Jackson offered his own prediction, saying that should a change come this year, the product would be somewhere between “what we’ve got now and a quarter of the way to where we want to get to.”
Tillis said he is worried that an effort to eliminate individual income taxes quickly could be tough for the state to absorb. Jackson said that was the feeling in the Senate, which would likely prompt a more gradual change.
“I think it’s going to be done gradually,” said Jackson. “There are lot of folks in the Senate who don’t like this proposal at all because they think it’s too much at one time, doing away with corporate income tax and personal income tax. They’re concerned that it’s going to be too much, that we can’t handle it.”
More talk is needed, and possibly modifications to the proposal before anything is formally introduced, he pointed out. However, a change is needed, in one form or another.
“This is still a work in progress,” said Jackson. “We’ve got to do something different or 20 years from now we’re going to really be in trouble — and it might not be 20 years. We’ve got our own fiscal cliff to deal with.”
Chris Berendt can be reached at 910-592-8137 ext. 121 or via email at cberendt@civitasmedia.com.
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