By Staff
In less than two months, North Carolinians will be electing the state’s next leader. The gubernatorial candidates, Pat McCrory and Beverly Perdue, have different visions for the direction they want to take the state. They both, however, have touted plans to make new investments in the state, which means they need to have the resources to pay for them. Yet, there has been a lack of attention paid by either candidate to North Carolina’s outdated revenue system. To ensure the state has the resources to implement their visions, we need a bipartisan debate about how to create a more adequate, equitable and modern revenue system and a commitment from both candidates to lead that reform upon taking office.
Today’s North Carolina is the product of generations of investments made to promote the common good. By working together, North Carolinians have created a host of world-class public services and institutions in education, transportation, public safety, recreation and health care. In return, these investments have fueled North Carolina’s growth, given North Carolinians an enviable quality of life and helped to make our state a player in the global economy.
Now, however, times are changing rapidly. Our economy, which was once based on agriculture and manufacturing, is now driven by technology, health care and other segments of the service economy. As a result, challenges and opportunities abound. With a booming population, our outdated revenue system is increasingly unable to keep up with the growing demand for roads, schools and services. Looking forward, it is essential that we have the funds needed to maintain and improve the public structures upon which we all rely.
The imminent change in North Carolina’s leadership presents an opportunity to build on past achievements as we face these new challenges. While some parts of our state and local revenue system are working well, rebuilding our revenue system so that is more adequate and fair is paramount in order to support North Carolina’s growth and ensure prosperity for future generations.
First and foremost, we need to rebuild our revenue system so that it grows with the changing economy and brings in enough money to pay for the investments and services that will enable the state to continually improve the quality of life for all. An updated system should also be equitable, meaning those with the smallest incomes are also paying the smallest share of their incomes in taxes. The lack of fairness in our current revenue system contributes significantly to the lack of adequacy.
An updated revenue system should continue a primary reliance on a progressive income tax because it is the fairest revenue source and will be the most adequate over time. Cutting income tax rates across the board, as McCrory suggests, does not amount to reform and would leave North Carolina in a worst place then even where we are headed. Rates could be lowered if we followed the lead of most states and broaden the income tax base. Adding more income tax brackets to the top would enhance the progressivity of the tax and promote greater adequacy. Perdue recently supported the new state version of the federal Earned Income Tax Credit which will help to make our system fairer, but more extensive changes need to be embraced to achieve meaningful reform.
Major changes must be made to our sales tax which excludes most services due to a historical application of the tax rather than a deliberate policy decision. North Carolina should extend the sales tax to services and use the additional revenue to lower the state and local sales tax rates. Under Perdue’s watch this year, the North Carolina Senate made a change in the wrong direction by passing a law to prohibit levying a sales tax on interior decorating services. Taxing services is inevitably necessary to ensure the sales tax keep pace with economic realities.
In recent years, North Carolina has fared relatively well compared to most other states in terms of having adequate resources to meet the needs of the state. As early as next year, the situation will not be so bright for us. Due primarily to slowing revenue growth, projected state revenues for next year will not be enough to maintain the current level of services let alone pay for any new investments. There are inefficiencies in our state spending that the next governor can trim, but budget cuts alone will not be enough to free up the resources needed to fund a growing state.
This looming fiscal crisis should prompt the gubernatorial candidates to consider and promote a comprehensive overhaul of our revenue system as their top priority if elected. Without reform, both candidates will face difficulties in finding the resources to fulfill their campaign promises.