Tax gamble kicks off

Dec. 29, 2013 @ 06:11 PM

The overhaul of North Carolina’s tax system that the General Assembly adopted earlier this year really begins to kick in Wednesday, New Year’s Day.

As we’ve noted before, the overhaul contains some strong positives and the underlying notion of simplifying the tax code and broadening the base of tax revenues are efforts that are long overdue. For too many years, our sales tax, for example, has been rooted in the industry-heavy economy of a generation or so ago, and has failed to reflect the more service and information-services economy of today.

Unfortunately, some aspects of the change will tend to help the state’s wealthiest residents and undermine some of the neediest. And other aspects of the overhaul can most optimistically be characterized as a gamble that, while we fervently hope it pays off, is dubious. And at least in the short term – and perhaps for the long haul – the new tax structure will starve the state budget of revenue that would have accrued had the changes not been made.

And while its champions characterized it as a measure to streamline the act of paying taxes, any taxpayer who has encountered the four-page worksheet for calculating the proper number of deductions to submit on new withholding forms many had to file may have found simplicity hard to discern.

The most immediately felt impact for the state’s poorest residents will be the loss of the earned-income tax credit, a sort of reverse tax for the working poor at the lowest end of the income scale. It meant often meant payments to them even if they owed no taxes. Those payments generally flowed immediately into the state’s economy because people living paycheck to paycheck tend to spend any extra money quickly, rather than saving or investing it.

The big bet is that dropping the state’s corporate income tax rate and eliminating higher tax brackets in favor of a single, lower bracket will attract new investment and business – and hence jobs and paychecks. The advocates of the changes engineered by the Republican majority in the legislature fervently believe that the state’s economic recovery will accelerate with a more business-friendly tax climate, offsetting any short-term loss in revenue from lowering tax rates overall.

Others beg to differ. As Gary Robertson of the Associated Press reported Sunday, the left-leaning North Carolina Budget and Tax Center is among the skeptics.  He noted that a center report had concluded that states that cut taxes the most in the 1990s had weak job growth and slow personal income growth.

The most honest assessment of the likely impact may have come from Michael Wenig, a tax modernization task force member with the N. C. Association of Certified Public Accountants.

“Sitting here today, will that work?” he said to Robertson. “I have no idea.”

We fear the skeptics, though, have it right – even as for the state’s sake, we hope the tax overhaul does more good than harm.