Capital Goods: October 2013

Road to reform detours into tax cuts

Despite the attention changes to abortion and election laws brought, the state legislature’s Republican majority considers those it made to the tax structure its key accomplishment this year. When the package passed after months of talk and weeks of negotiations, lawmakers called it “historic” and “momentous” — a boon to all, especially business. “It helps those that are here now,” Rep. David Lewis, the Dunn Republican who was one of the architects of the plan said at the time. “It helps attract others that might come in and create more jobs.”amet, faucibus sed, aliquet eget, nulla. Aenean dolor arcu, aliquam in, interdum et, tincidunt sit amet, nulla. Cras mollis lectus vel orci. In laoreet blandit libero. Nullam nec metus non mi viverra consectetuer. Nunc sed nunc. Etiam fringilla, ligula a posuere varius, elit magna dignissim dolor, a dictum turpis nibh et est. Donec porttitor. Ut placerat, tortor et adipiscing bibendum, velit purus varius tortor, eget tristique tellus turpis at telluSeeking to drill into its potential, lawmakers have brought the idea to the General Assembly, where questions of environmental preservation have dominated discussion about the controversial means of extraction. But something more fundamental to the industry’s success or failure will determine whether North Carolina’s supply of shale gas — by some estimates enough to meet the state’s demand for four decades — generates even a flicker of game-changing economic activity.and weeks of negotiations, lawmakers called it historic  — a boon to all, especially businesses. “It helps those that are here now,” said Rep. David Lewis, the Dunn Republican who was an architect of the plan. “It helps attract others that might come in and create more jobs.”

Like the aforementioned abortion- and election-law changes, the tax overhaul attracted media attention outside the state, though its coverage didn’t skew as negative. The CNN Money website noted that, while Washington dithered on national tax reform, Raleigh took action. In the Wall Street Journal, economist Stephen Moore echoed Lewis, saying the cuts will “spur growth and job creation.” (Some liberal national pundits disagreed, calling them a shell game to benefit the wealthy.)

None of those pundits live in North Carolina. They’ll neither enjoy nor suffer the consequences of the changes. Those on the outside looking in rarely delved into the details of the tax law or the nitty-gritty of the process that led to its passage. Doing that, you discover that the end product does not resemble what those beating the drum for tax reform described. The result was a tax cut for many that could turn into a tax increase for a few.

Sen. Bob Rucho lived and breathed tax reform all year. What passed, though not perfect, is better than what the state had, he says. The Matthews Republican, who co-chairs the Senate Finance Committee, traveled a strange route to reach that conclusion, one worth retracing to understand where the state’s tax structure wound up compared with where it was supposed to go. In November and December, he criss-crossed the state with his stacks of papers and PowerPoint presentations, trying to sell tax reform to business and policy groups. “The existing system isn’t going to work now or in the future,” he told them. His ideas were bold. He didn’t want just to lower taxes on personal and corporate income. He wanted to do away with them, along with dozens of tax breaks, loopholes and carve-outs for various industries and constituencies. To replace revenue, he proposed extending sales taxes to cover virtually all services not involving business-to-business transactions. That was needed to keep tax reform “revenue neutral,” meaning it neither raised nor cut the amount of money the state would receive.

In the spring, Senate President Pro Tem Phil Berger seemed ready to run with Rucho’s plan. The Edenton Republican launched a website promoting its concepts, but some business and industry groups pushed back. At a committee meeting, Rucho asked lobbyists to raise their hands. “Members of the committee,” he said, “I just want you to remember those are the folks that are in the process of trying to be sure that this tax system stays complicated and loopholes are maintained.” No bill was filed encompassing all of Rucho’s ideas. The joke around the Legislative Building was that the measure was like Bigfoot — massive, scary and no one had seen it.

A few weeks later, Berger unveiled an alternative that would roll back corporate and personal income taxes but leave the sales tax alone. It would eventually cut taxes by more than $1 billion a year, trimming the state’s general operating budget of roughly 5% of projected revenue. Wounded, Rucho responded by resigning as as finance co-chairman. Berger refused to accept his resignation. Eventually, they patched things up. And eventually, the legislature passed a plan that scaled back the magnitude of the cuts, even if it looked nothing like earlier talk of a revenue-neutral restructuring of how state government collects taxes.

What passed eliminated the tiered rate structure for personal income in favor of a flat 5.75% and reduced the corporate income tax from 6.9% to a rate that will fall to 5% in 2015 — and could go even lower if the state hits revenue targets in future years.

Standard deductions were raised, but deductions for mortgage interest were capped. Legislators did a little tinkering with the sales tax, expanding it to a few items such as baked goods and service contracts. An exemption on the first $50,000 of business income for noncorporate business filers, passed just two years earlier, was dropped. In total, the overall tax cut will eventually come to about $600 million a year.
Democrats lambasted the package as a gift to the wealthy, not real reform, and warned it would starve public education. Critics also noted that elimination of the small-business exemption could leave some paying more, not less. The Republican response: It puts our taxes more in line with our Southeastern neighbors. It does, and legislators are counting on that to float the state’s economic boat. Now everybody will be watching and waiting for the incoming tide.             

Scott Mooneyham is editor of The Insider, www.ncinsider.com. Email him at smooneyh@ncinsider.com.