State Treasurer Janet Cowell, speaking Wednesday night to the annual dinner for the Centralina (NOT Metrolina) Council of Governments, said something that perked up my ears considerably.
She said, in response to a question from Belmont Mayor Richard Boyce, asking what the role of the state treasurer is in comprehensive tax reform:
Cowell said that in talks with bond rating agencies N.C. officials were told that they want the state to reform its tax structure, so it’s more stable. Without reform, she said, we could be put on a watch list. Cowell says she told this to N.C. Senate Majority Leader Martin Nesbitt, D-Buncombe. “I don’t think we have the luxury of doing nothing,” she said.
Here’s why this should be of interest to more than just tax policy geeks (I plead guilty to being one). The state’s revenue system, which depends primarily on income taxes and sales taxes, was set up in the Depression. It doesn’t recognize the many economic changes that have taken place in the 80 years since then – the loss of manufacturing, the rise in the service economy, the explosion of online commerce (most of it untaxed). The sales tax is among the most volatile of taxes, fluctuating greatly when times are good, or bad. Income taxes are less volatile but still show big dips and surges depending on the economy’s strength. (Update: 4:45 PM – State Sen. Dan Clodfelter tells me that the problem in North Carolina is that income tax revenue is more volatile than sales tax. “The single most volatile, unpredictable, unreliable tax is the corporate income tax, and that fact has nothing to do with exemptions, loopholes, concessions, or anything of that ilk,” he e-mailed me. He’s a major mover pushing for tax reform and wants to do away with the corporate income tax.)
The state keeps going to those same buckets – sales taxes on goods, and income taxes. A tax reform proposal in the legislature would lower the general sales tax rate but extend the sale tax to some – not all – services. It would do other stuff, such as tinker with business privilege license taxes – which has alarmed the folks at the city of Charlotte, which gets about $16.6 million a year from that little revenue stream.
The upshot of all this is that many states have attempted comprehensive tax reform and few have succeeded. Every business with a loophole fights like mad to keep it. Because the reform would raise some taxes and lower others, some of the “I’m anti-tax” blowhards take up sloganeering against it on grounds that it raises taxes, carefully neglecting to mention that some taxes go down (like, say, the overall sales tax rate).
But for Cowell to weigh in with the specter of bond rating repercussions does imply that folks in the power offices in Raleigh are taking this reform effort seriously. Or at least, that they ought to.
(And if you’re still with me here, you are clearly a tax policy geek, too, in which case you’ll enjoy the latest State of the States 2010 report from the Pew Center on the States.)