January 2, 2005
RALEIGH — As another large state budget deficit has some urging North Carolina lawmakers to “reform” the tax code to confiscate additional hundreds of millions of dollars, the John Locke Foundation released a new report on tax policy at a January 3 luncheon in Raleigh.
Dr. Roy Cordato, vice president for research at the John Locke Foundation, spoke at JLF about his latest policy report, Liberty and Economic Growth: Principles for Reforming North Carolina’s Tax System.
While some analysts recommend that North Carolina use reform as an opportunity to increase the overall tax burden in the state, Cordato argues that the real goal should be to reduce the distortions and costs imposed by the state’s outmoded and economically destructive tax policies.
“North Carolina’s system of taxation aggressively interferes with individual liberty and retards economic growth,” Cordato wrote in the report. “It is quite clear that our current system has been developed without an understanding of how socially damaging a poorly designed tax system can be.”
Cordato’s recommendations for tax reform extend across a number of different fronts. They include:
• Replacing the current state income tax with a flat-rate “consumed-income tax,“ thus ending the double-taxation of savings and investment and reducing the extent of tax discrimination.
• Abolishing the corporate income tax, which is really a hidden form of double-taxation on some forms of personal income.
• Eliminating all special tax breaks for economic development.
• Ending differential rates of sales and excise tax on selected items and exempting non-retail purchases from the retail sales tax.
Policymakers should not fall for the argument that North Carolina’s existing tax code is inadequate to the task of raising enough revenue for core state services, Cordato says. Expanding the scope of the sales tax to apply to services sold at retail, for example, would only be worth doing if the result was a permanent reduction in the sales-tax rate — a reduction that cannot be guaranteed and, more likely, would be opposed by politicians who really want to raise taxes by using reform as camouflage. A better way to treat all forms of consumption equally for tax purposes, he argues, is to rely on his proposed consumed-income tax, in which all household purchases of good and services would be taxed at a single rate.
An ideal state tax system, Cordato says, does not have to be accomplished in a stroke. Intermediate steps can be taken to move North Carolina’s tax code in the right direction. These would include exempting interest from the income tax and reducing the number of marginal tax rates.
“Unfortunately, North Carolina lawmakers have rarely given any consideration to the basic principles of tax policy,” Cordato wrote. “The state’s tax system is an incoherent hodgepodge of penalties and subsidies that unnecessarily infringes on personal liberty and causes the state to be much less prosperous than it otherwise could be.”
For more information, call Cordato at 919-828-3876.