In the face of severe budget shortfalls for both the current and next fiscal years now estimated to be between $500 million and $700 million1 Senate President Pro Tem Marc Basnight has proposed a rather novel revenue raiser. By forcing North Carolina retailers to send their sales tax collections to the state by electronic transfer rather than check, Basnight said in a recent press interview, the state could gain as much as $100 million a year in additional revenues by earning additional interest on the balances.2 (When contacted, Senator Basnight’s office could not verify the source of this estimate.)
While portrayed as a cost-saving measure, the senator’s proposal would constitute a hidden, across-the-board tax increase on all retail businesses. Like other taxes it would involuntarily transfer revenue from the citizenry to the state. Furthermore, because it involves no overt changes in business taxes i.e. changes in either tax rates or the tax base Basnight’s idea has the particularly pernicious effect of being a hidden tax that is not seen even by those who will suffer the burden.
This fiscal slight of hand is accomplished by eliminating what is known as a “float,” which currently benefits the taxpaying businesses. With respect to sales taxes, retail businesses perform a valuable and uncompensated set of services for the state government. They collect the tax, keep records as to how much tax their customers have paid, and then forward the proceeds to Raleigh by writing a check and sending it through the mail.
For most businesses these payments are made either monthly by the 15th or semi-monthly depending on how much sales tax revenue the business receives. “Float” refers to the time that it takes for the state to process the checks and deposit them in the state’s account. During this period retailers continue to earn interest on the funds. If businesses were forced to transfer the collected taxes electronically, the money would go directly to the state’s bank accounts, imposing costs on the businesses equivalent to the amount lost in forgone interest.
Assuming for the moment that Basnight’s revenue estimates are correct, his plan would be the equivalent of a $100 million tax increase on businesses that are required to charge sales taxes. As noted, this tax is hidden. This is because it is measured in revenues that are never realized and are not paid directly to the government by any of the businesses involved. Nonethe-less, the tax is real and lost revenues will have to come from customers, workers, or shareholders.
Furthermore, the senator’s plan proves the age-old adage that no good deed goes unpunished. As pointed out, businesses are forced to incur the costs of sales tax collection. This is a free service to the state, the costs of which are equivalent to a tax. According to the accounting firm of Ernst and Young the costs incurred by businesses in administering state sales tax collection ranges from 7 to 14 percent of total taxes collected, depending on the size of the business.3 This means that North Carolina retailers incurred costs of $235 million to $471 million in tax collection expenses last year.4This freebie to the state, once again, is a hidden tax that is borne by North Carolina’s consumers, workers, and business owners.
The only legitimate reason for making the change that Basnight suggests would be to reduce government costs associated with processing the checks as they come in from businesses. This should not be done with revenue enhancement in mind, but in a framework of revenue neutrality. Any windfall to the state in terms of interest income should be returned to businesses as a reduction in business taxes or more specifically in the form of a sales tax reduction. The retail sector of our state’s economy is already overburdened with costs associated with the state sales tax. Basnight’s proposal to require electronic transfer of sales tax payments would simply add insult to injury.
State leaders have no need to resort to tax increases, visible or invisible, to address the budget deficits. As outlined in a previous Spotlight, lawmakers should examine the base budget to find real savings in such areas as corporate welfare, university spending, Medicaid, agency duplication, and unneeded state assets and reserves.5
Dr. Roy Cordato, Vice President for Research
- Kerra Bolton Fisher, “Budget shortfall swells to $700M,” Asheville Citizen-Times, February 2, 2001.
- Paul O’Connor, “State looks to the Internet to fix budget problems,” Chapel Hill News, January 17, 2001, p. A5.
- Press Release, Ernst & Young, www.ey.com/global/gcr.nsf/US/09-08-99_-_Release_-_News_Room_-_Ernst_%26_Young_LLP.
- Fiscal Research Division, Overview: Fiscal and Budgetary Actions, North Carolina General Assembly, 2000 Session, July 2000, p. C-6.
- Roy Cordato, “Crisis or Opportunity,” Spotlight No. 185, John Locke Foundation, January 18, 2001.