BTC Proposes Reform to North Carolina’s Tax and Revenue System

by Holly Safi

People with disabilities in North Carolina are facing drastic cuts in funding to important services, $2 Billion from Medicaid alone. North Carolina’s 2012 revenue is expected to be $2.4 billion less than it needs to maintain the current level of expenditures. Under the existing tax structure the poorest North Carolinians pay a significantly greater percentage of their income to state and local taxes than do the wealthiest. Simply cutting funding, as proposed in the recent House and Senate budgets, is a short-term solution that will harm those with the greatest needs now and the NC economy in the long run.

The North Carolina Budget & Tax Center (BTC), a project of the North Carolina Justice Center, has developed a progressive plan to reform the NC system of revenue and taxation to ensure it will be equitable among its citizens and businesses, adequate to fund necessary public structures and investments, and stable enough to survive downswings of the economy. The BTC estimates that this plan could raise $1.3 billion in revenue over the next fiscal year. Some highlights of this plan are as follows:

Personal Income Tax Reform (anticipated benefit of $634 million)
• Increase the number of income tax brackets from three with rates of 6.00%, 7.00%, and 7.75% to six with rates ranging from 5.00% at the lowest bracket to 8.50% for the top bracket.
• Calculate taxable income based on adjusted gross income instead of federal taxable income which includes various deductions.
• Significantly increase the standard deduction but eliminate other deductions and credits except mortgage interest, medical expenses, and charitable contribution itemized deductions.
• Allow a 3% credit of either the standard deduction or the total of the three allowed itemized deductions to give a standard tax benefit to all income levels.
• Double the state Earned Income Tax Credit and merge the child tax credit and personal exemption into a $180 per-person credit so that tax benefits increase with family size, not income.

Sales Tax Reform (anticipated benefit of $500 million)
• Current sales tax that taxes primarily goods falls heaviest on the poor who tend to buy goods rather than depend on services.
• Decrease the state sales tax from 4.75% to 3.75%
• Expand the state sales tax to incorporate most consumer services.

Business Tax Reform (anticipated benefit of $202 million)
• Require multi-state corporations to file one single tax return rather than shifting their profits to states with lower taxes.
• Stop preferential treatment of LLCs and tax them the same as other corporations.
• Eliminate other “privilege” taxes that have shown ineffective in job creation.

Tax Expenditure Reform (anticipated benefit difficult to measure)
• Tax expenditures are funds that are “spent” by not collecting them in the first place: credits, deductions, exemptions, etc. They often do not get continued review of necessity and/or effectiveness once they are enacted.
• Give tax expenditures the same rigorous scrutiny as appropriations during each budget cycle.

Read the report for yourself here.