Winston-Salem Journal

North Carolina taxpayers got a break last week when Gov. Bev Perdue scuttled legislators’ $980 million tax-increase package.

Perdue opposed the deal because it was both unfair to working families and failed to protect public education. Her power to veto the budget killed the package. Perdue’s opposition sent legislative leaders in search of another solution to the state’s budget crisis. Varying estimates and interpretations of the situation put the state as much as $4 billion-plus short for this budget year. The state is operating on a “continuing resolution” that extends last year’s budget on a proportional basis.

House and Senate budget and tax negotiators – the most powerful legislators in Raleigh – had made a deal that fell heavily on consumers and working families. It included a one percent sales-tax increase, a regressive tax that hits young families and the poor harder than the affluent.

The package included a regressive 2 percent surcharge on the income-tax obligation each individual North Carolinian and corporate taxpayer will have at the end of this year. It also increased taxes on beer, wine, spirits and tobacco products.

In all, only a small piece of the package hit corporations – about $15 million in income-tax surcharges and the sales taxes they pay.

The package also lacked any originality. Legislators simply pursued the same old tax increases they have used over the last 10 years as state revenues have repeatedly failed to meet their spending targets. These shortfalls arise because the state’s tax system is based on a mid-20th century economy and we’re decades past that now.

There are proposals to expand the sales tax to services, thus covering a wider economic base. If legislators were to adopt such taxes, they could also lower the sales-tax rate. We might pay a sales tax on a haircut, a ballgame ticket, car repair labor or accounting fees, but we’d also pay less on items currently covered by the sales tax, like clothes for our children.

Just as important, the tax increase would be spread more evenly across the spectrum of family incomes and to corporations. But legislators fear taxing services because so many people, from barbers to wedding-party violinists, would be newly covered.

Rather than fear a lower sales tax on those services, legislators should be afraid of the economic consequences of a sales tax that would rise to 8.25 percent in Mecklenburg, 8 percent in several other counties and 7.75 percent in the majority of counties. That is not a sustainable level of taxation.
Perdue was right to nix this package.