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From Governing’s Supplemental information | Introduction
More than any other factor, though, it was the Depression that tilted the Tar Heel State toward a centralized system. During those years, more cities and counties went into default in North Carolina than anywhere else in the country. The state felt compelled to take over a wide variety of previously local tasks, including large elements of the education, prison and road systems. To pay for those responsibilities, the legislature instituted the state sales tax and raised the rates on personal income. Partly as a consequence of these decisions, North Carolina has long had some the best roads in the country, schools that are more equitably funded than most, and relatively low local property taxes.
The basic tax system remains effective. It’s not generally regressive and has a good mixture of revenue sources. On the other hand, the sales tax is narrowly drawn, with limited coverage of expensive items and little application to services. Because income tax receipts provide nearly half the state’s revenue, the collapse of capital gains earnings has really hurt over the past couple of years. This problem came on top of heavy losses to the budget from a pair of hurricanes, a devastating flood, two major lawsuits and damaging snowstorms. Even before the economy turned sour, the state’s rainy day fund was nearly empty. In an effort to shore up its budget, North Carolina was one of four states to raise total taxes by more than 1 percent in 2001, with a temporary half-cent sales tax increase, an increase in upper-end income tax rates, a new liquor tax and a levy on health maintenance organizations. (Cigarette tax increases have so far been off limits — the current tax is 5 cents a pack, among the lowest in the country.) The 2001 tax increases weren’t nearly enough. This year’s $14.3 billion budget was balanced with a host of one-time revenue gimmicks, and the gap next year is being estimated at close to $1.8 billion. Ironically, the state which prided itself 70 years ago on its generosity to local government is now wrangling with localities that claim they are being cheated. Last summer, a group of cities and counties sued the governor and the secretary of revenue for withholding tax money meant for local use. One county commissioner went so far as to call Governor Mike Easley a “criminal” and a “terrorist.” The General Assembly ultimately gave counties the option of a new half-cent sales tax to replace the missing dollars, but local suspicion of another state money grab remains strong. Under this kind of pressure, it is no surprise that tax revision is a hot topic. “The major concern is stability,” says Tom Ross, chairman of the Commission on Modernizing State Finances, which has recommended a broadening of the sales tax to cover services, a dramatic reduction in tax credits for businesses, and a new commitment to use one-time rebates rather than permanent rate cuts as a means of providing tax relief in flush times. This last proposal reflects a recently learned lesson. North Carolina cut about $1.5 billion in taxes annually from 1995 to 1998. It could use that money now. While most of the proposals seem sensible at first blush, they are contentious, especially those dealing with business taxes. Although the state has closed some corporate tax loopholes in the past two years, a tightening of bank taxation was codified in ambiguous fashion in 2001 and had to be rewritten in 2002. The governor’s office believes the reform is now on the right track, although the local press has been somewhat dubious. Meanwhile, pressure to use taxes to enhance economic development remains intense. Even though the tax-modernization commission is recommending a reduction in tax incentives to attract new companies, the General Assembly recently passed a new subsidy that will allow up to 15 firms a year, selected by a panel, to retain up to 75 percent of the withholding paid by their employees. The program is capped at $10 million annually. Proponents argue that this is superior to the broad, untargeted tax benefits given out in the past. To its credit, the legislature funded new technology for its tax department when times were good. A state report in October 2000 acknowledged notable achievements in the use of imaging technology and the automation of tax functions. The same report, however. criticized the department for a lack of training and staff. Since then, audits and collections have been bolstered. A $370 million backlog in accounts receivable is now down to $250 million. In June 2001, the Revenue Department set a target of $150 million in new collections for the next two years. Eighteen months later, it had achieved $110 million of that goal through techniques that included garnishing employee salaries and posting a list of “tax debtors” on the Internet. “It’s not rocket science,” says Secretary of Revenue Norris Tolson. “These are very standard collection techniques to make sure that delinquent taxpayers know that we’d like them to pay their bill.” Copyright © 2003, Congressional Quarterly, Inc. Reproduction in any form without the written permission of the publisher is prohibited. Governing, City & State and Governing.com are registered trademarks of Congressional Quarterly, Inc. |
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orth Carolina has been something of a pioneer when it comes to centralizing its tax structure. Back in 1921, it was one of the first states to establish a graduated income tax; 12 years later, it created one of the first experiments with a statewide sales tax.