After raising taxes last year, only to find out that revenues have decreased since then, Raleigh is considering another approach. Well, sort of. State legislators have been meeting during their interim “off-season” to discuss tinkering with the state’s sales tax code which dates to the Depression era.

Facing unprecedented budget shortfalls, the Democrat controlled General Assembly raised a whole host of taxes last year. But something didn’t work.

The new taxes don’t seem to be producing enough additional money for the state’s coffers. So now, legislators are looking at broadening the tax base to cover areas of the economy that currently aren’t taxed. This, they claim, would enable the state to reduce other taxes across the board.

North Carolina’s income tax rate is relatively high, up to 7.75 percent for those earning over $60,000 per year. Compare that to other states like Colorado (4.63 percent), Illinois (3 percent), Indiana (3.4 percent), Massachusetts (5.3 percent), Michigan (4.35 percent), Pennsylvania (3.07 percent) and Utah (5 percent).

Several states have no personal income tax whatsoever, such as Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington and Wyoming.

North Carolina’s sales tax is also fairly high right at 8 percent after a “temporary” increase this past August. Some counties such as Mecklenburg are even higher.

Remember “Tax Hike” Mike Easley’s half-cent “temporary” sales tax hike – that temporary hike that was extended indefinitely in 2005? Funny how temporary tax hikes always wind up being permanent, but tax cuts like the Bush tax cuts are designed to eventually expire automatically.

One issue both Republicans and Democrats in Raleigh are now looking at is the narrowness of the scope of the state’s sales tax. The tax does not currently cover services such as lawn care, plumbing, hair styling, etc.

In a theoretical sense, it might be better to expand the tax base to cover these services with a consumption tax such as this proposal. A consumption tax is a tax on spending on goods and services. The sales tax covers spending on goods, but not currently spending on services.

By some accounts, this service sector accounts for more than 75 percent of the state’s economy. This means we are only taxing 25 percent of the taxable economy. The thought is that if the sales tax is expanded to cover these areas of the economy, perhaps the overall rate could be reduced.

Both Republicans and Democrats in Raleigh agree that broadening the tax base is a step in the right direction, according to a joint Senate and House Republican Caucus press release from the Offices of Rep. Paul Stam (R-Wake), Sen. Phil Burger (R-Rockingham) and Sen. Eddie Goodall (R-Union).

While choosing a tax is like deciding if you want to be robbed at gunpoint or knifepoint, if I had to choose a form of taxation, it would probably be a consumption based tax. Founding father and Federalist Papers writer Alexander Hamilton championed consumption taxes because “they contain in their own nature a security against excess.”

Hamilton reasoned that the higher a consumption tax, the less people will consume, thus reducing overall government revenue. Thus, a consumption tax generally doesn’t get so high as to be onerous.

But this shift to tax services is not going to be good for small businesses that provide them, especially in this economy. Finding a new way to take money away from small businesses who are struggling to make payroll is not a wise move.

And it won’t be good if you ever use lawn care services, get your hair cut, or call a plumber, because you’ll be the one paying these new services taxes. Even if Raleigh lowered other taxes, the “savings” would be consumed by the new consumption tax on services. And I wouldn’t hold my breath either, waiting on Raleigh to lower those other taxes. So, it’s really a wash. In the end, the state would be taxing a previously untaxed portion of the economy. Both the suppliers and the consumers of these services will be negatively impacted by the new taxes.

This whole approach assumes that North Carolina has a revenue problem. But I submit it’s really a spending problem.

With a state budget literally doubling in size in less than a decade, the fact that you have a budget shortfall is sign that you have a spending problem. Revenue just can’t keep pace with Raleigh’s spending like there’s no tomorrow.

The dirty little secret about taxation policy is that you can actually increase revenue by cutting taxes. The theory behind this economic principle was popularized by economist Dr. Arthur Laffer in the 1980s.

Laffer’s work showed that lower taxes incentivizes hard work, saving and investment. Lower taxes means more money in the hands of businesses and individuals and this allows the private sector to grow and create more jobs.

The increased economic activity spurred on by lower taxes creates more taxable transactions. Thus, you can increase revenue by lowering taxes. Google “Laffer Curve” to find a graph that illustrates the principle.

Of course, there is a point of diminishing returns. If taxes are cut too far, eventually revenue begins to decrease. By the same token, when taxes get too high, productivity decreases and government revenues plummet.

The Bush tax cuts are a good example of how a sensible reduction in taxes actually increases revenue. According to the Congressional Budget Office, from 2003 to 2006, during the Bush tax cut years, federal revenue increased by $625 billion, or 35 percent.

Instead of thinking of ways to increase taxes, we ought to be looking at ways to reduce taxes while reducing spending. This would increase personal economic liberty, spur growth, and put the state back on track toward fiscal responsibility.



Tar Heel Dispatch is written by Tyler Younts, a second-year law student at Campbell University. Younts, who grew up in Farmer, has a passion for writing and for politics and for writing about politics. E-mail comments to news@randolphguide.com or directly to Younts at tlyounts0209@email.campbell.edu