Capital Goods - June 2009

Tax could be at your service
By Scott Mooneyham

Every so often, I’m reminded that journalists enjoy only about as much popularity among the general public as lawyers. Usually those reminders come from friends who happen to be, yes, lawyers, which forces me to retort that, even so, there’s no genre of jokes focused solely on disparaging my chosen yet troubled profession.

Still, hang around the General Assembly long enough, and you’ll probably conclude that lawyers — no matter how witty your comparison to sharks — rule the world. They don’t dominate the ranks of the legislature the way they did a few decades ago, but they do hold a lot of the positions of power. The speaker of the House, he’s a lawyer. The chamber’s minority party leader and chief budget writer, they are too. In the Senate, both party leaders practice law. Out in the hallways and sitting in the committee rooms, many of those lobbyists have law degrees.

So it was no surprise to find the legal profession conspicuously absent from one of the major provisions of a preliminary Senate plan to revamp the state tax structure. If it becomes law, the plan would represent the most substantial reworking of North Carolina’s tax code since the Great Depression, including major shifts in personal-income and business taxes. The biggest departure from current policy, though, would be a sales tax on services. It’s an idea that’s been kicked around for a while.

Supporters say a service tax — on car repairs, lawn maintenance and the like — is needed because the sales-tax base is eroding as we move from a goods-based to a service-based economy. There’s also an issue of tax fairness. The wealthy are more likely to hire a lawn service. The not-so-wealthy are more likely to cut their own grass, paying sales taxes when they buy a lawn mower or weed trimmer.

On the list of services that the Senate leadership wants to tax are lawn care, home repairs, entertainment events and a host of others. But you won’t find legal services there. Nor accounting and architectural services. Sen. Dan Clodfelter, a Charlotte Democrat and the plan’s own architect, says he wanted to avoid taxing business-to-business professional services that could cause double taxation. He also notes that taxing one professional service would mean taxing 30 or 40, just to be fair. And would taxing the services of real-estate brokers, given the state of the current housing market, be a good idea?

By the way, Clodfelter? He’s a lawyer. By now you’re thinking lawyers are going to get a free ride, right? Not exactly. A goal of the plan is to lower the personal and corporate income-tax rates to make North Carolina more attractive to businesses seeking to set up shop in a Southeastern state.

The loss of revenue would be made up in a couple of ways. Some personal-income deductions would be dropped, and the state tax would conform more closely to federal income calculations. Also, partnerships and LLCs would begin paying a franchise tax as businesses organized as corporations do. Legal firms would have to pony up an annual franchise tax based on the amount of assets they hold. The change would bring in an estimated $130 million as 270,000 companies statewide begin paying the tax. “That’s a tax not on their customers but on them,” Clodfelter says of the law firms in that group.

But another Charlotte lawyer has a different take. Richard Vinroot, a former mayor and Republican candidate for governor, sees nothing wrong with taxing legal services. In fact, he believes it’s a way to make the entire package politically palatable, with a caveat: He wants to lower personal- and corporate-income rates to a level that makes the plan revenue neutral, meaning the package wouldn’t raise taxes overall. As initially envisioned, the plan would raise revenue from state and local taxes more than $800 million.

Vinroot has more than a passing interest. He served on a committee of business people that former Gov. Jim Hunt’s Emerging Issues Institute put together to study service taxes and tax reform. “I was a little surprised that lawyers and other professionals were going to be exempted,” Vinroot says. “None of us are sacred cows.”

From the start, Clodfelter has emphasized that a proposal this big is a work in progress. So far, it’s just charts, graphs and spreadsheets. No bill has been filed. Maybe none will be. Maybe no vote will ever be taken. But given the state’s financial shape, the idea isn’t going to slide into the abyss. Lawyers, like everyone else, could find themselves facing an entirely new scheme of taxation.

Scott Mooneyham is the editor of The Insider,