December 6, 2006
RALEIGH – Legislative leaders might try to use sleight of hand and a series of political deals to raise taxes by nearly $1 billion. That’s the conclusion of a new John Locke Foundation Spotlight report.
Click here to view and here to listen to Joseph Coletti discussing this Spotlight report.
“Legislative leaders hope taxpayers won’t notice the $940 million tax hike,” said Joseph Coletti, JLF Fiscal Policy Analyst and the report’s author. “Here’s how they could do it. Their scheme would take one cent from the 2.5-cent local sales tax and give it to the state. In exchange, the state would give local governments the option to raise the sales tax rate by another cent.”
The end result would be a higher sales tax rate that takes $940 million more from taxpayers, Coletti said. “That would mean a new 7.5 percent general sales tax rate for most counties and 8 percent in Mecklenburg,” he said. “Unlike the last sales tax increase in 2001, this increase would be permanent.”
North Carolina already has a higher state and local tax burden than any other state in the region, Coletti said. “The proposed sales tax increase would expand the gap between North Carolina and its neighbors,” he said. “The Tar Heel state would also have the 12th highest state and local sales tax rate in the country.”
Lawmakers could try to win support for their plan by combining the sales tax switch with other spending and tax changes, Coletti said. The state would take over counties’ $470 million Medicaid burden, offer an earned-income tax credit for low-income workers, and cut the corporate income tax rate. Even with the corporate rate cut, the net tax increase would total $840 million.
“This type of scheme would attempt to buy off interest groups while giving the appearance of addressing these critical areas,” Coletti said. “Like the e-mail you received from an exiled Nigerian oil minister, this legislative tax scheme counts on you being so overwhelmed by the promise of riches that you ignore the costs.
“Without being part of meaningful tax reform, these deal sweeteners would do little to improve the lot of working people or spur economic growth,” he added.
Coletti’s report recommends avoiding any tax increase while taking other steps to address legitimate state funding concerns. Those steps include searching for Medicaid savings, improving the state’s road-funding formula, and increasing the efficiency of the school construction process.
He also advocates tax and spending reform. “North Carolina’s reliance on a progressive personal income tax and a regressive sales tax on goods leave government revenues vulnerable to economic cycles,” Coletti said. “Targeted tax incentives make the system even more complex.
“Spending reform would end the boom and bust cycle of the state budget,” he added. “A consumed-income tax and corporate income tax repeal would produce a simple, efficient, and equitable tax code that spreads a low tax rate over a broad taxpaying base.”
Joseph Coletti’s Spotlight report, “Billion-Dollar Tax Hike: Legislative Leaders Consider Spend and Tax Mash-Up?” is available at the JLF web site. For more information, please contact Coletti at (919) 828-3876 or [email protected]. To arrange an interview, contact Mitch Kokai at (919) 306-8736 or [email protected].