McCrory says tax reform 'won't be easy'
Gov.-elect Pat McCrory told business leaders at an economic forum in Durham on Wednesday that he plans to pursue tax reform for the state, with corporate income and personal income taxes topping his list of tax concerns.
“It won’t be easy, it’s going to step on everyone’s toes a little bit,” McCrory said at the 11th annual Economic Forecast Forum, hosted by the North Carolina Bankers Association and the N.C. Chamber of Commerce. The forum was expected to draw about 1,100 people to the Sheraton Imperial Hotel and Convention Center.
McCrory said his priorities for the short-term after he’s sworn in Saturday include making decisions regarding provisions of the national health care reform law – whether the state, the federal government, or a combination, will set up its health insurance exchange, and whether it will expand Medicaid. States face a choice about whether to expand Medicaid following the Supreme Court’s decision upholding the Affordable Care Act in June.
McCrory said his appointed health secretary is evaluating the short- and long-term implications of the state’s insurance exchange options, and he’s been talking to governors from other states. He said governors are “very divided on this issue.”
“There is no consensus on this issue in the state or in the nation, but we’re going to make the best long-term decision for North Carolina,” McCrory said.
McCrory also said he believes the state has “fallen behind” regarding energy exploration, and he wants to “immediately start taking action” to form a coalition with leaders in Virginia, South Carolina, and Georgia to negotiate off-shore drilling at least for natural gas, and possibly for oil.
He said tax reform is needed because he believes the state’s tax system is no longer competitive with the rest of nation, and when compared with neighboring states like Tennessee, Virginia, and South Carolina. The state has “very high” income tax, a high sales tax, and corporate tax rates, he said, but he’s particularly concerned about corporate and personal income taxes.
Beth Stevenson, a spokeswoman for the N.C. Department of Revenue, said in an email that the corporate income tax rate is 6.9 percent. North Carolina’s personal income tax rates vary depending on a person’s filing status and annual income.
Michael Brown, an economist for Wells Fargo, said in a special session on tax reform at Wednesday’s forum that a challenge for state policy makers is how to increase revenue in the country’s “new normal” for economic growth. The nation’s economy is expected to grow moderately in the 2 percent range, he said.
A piece of good news, Brown said, is that there have been “substantial” year-over-year home sale price gains nationwide, but there’s also a lag in state and local government property tax collections.
Until the recession, North Carolina’s tax base saw fairly stable growth, Brown said, with some cyclical fluctuations. But the housing bust damaged property tax collections, he said, and there are still unemployment issues the state is “still trying to deal with.” Unemployment impacts the size of the consumer base, and he said a smaller consumer base can “wreak havoc” on sales tax collections.
Twenty-seven percent of the state’s general fund revenues are projected in the fiscal year that ends June 30 to come from sales and use tax collections, according to information from the N.C. Office of Management and Budget, while 52 percent is projected to come from personal income taxes.
Corporate income tax revenues are expected to be $1.1 billion in the fiscal year, making up 6 percent of the general fund revenue. All other revenue sources are expected to account for 15 percent of general fund revenues.
The state is seeing income growth, Brown said, but a “big chunk of that” is tied to Social Security and unemployment benefits, while he said wage and salary growth are “still fairly sluggish.” The state’s state and local tax burden as a percentage of income is “right around average” nationally. Regionally, he said, state is “not quite as competitive” compared to Tennessee and South Carolina.
He outlined possibilities for tax reform that included adjusting personal income brackets for inflation, which he said would account for the increases in labor costs over time as a result of a more skilled workforce.
Brown also said the state misses out on a “large amount of potential revenue” in the sales and use tax category by taxing hard transactions, so he said one option is to tax services like health care.
He also said the state’s corporate tax rates are “out of whack,” especially compared to states such as South Carolina and Tennessee, but the state does offer incentives to businesses. He suggested widely publishing the effective corporate tax rates that also account for incentives.
Rep. Larry Hall, D-Durham, who was elected minority leader by state House Democrats, said McCrory’s statements Wednesday were not a specific answer, but a broad statement, in response to state tax challenges.
He said he believes the question is going to be about how do we “make up the revenue that we need to operate the state?”
Hall said he believes tax reform is needed.
“A lot of things have changed, and we do need a tax system that reflects those change in the way we do business and earn income,” he said.