01/16/11 — Treasurer talks taxes, pushes for reforms

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Treasurer talks taxes, pushes for reforms

By Steve Herring
Published in News on January 16, 2011 1:50 AM

GREENVILLE -- While most speakers at Thursday's State of the Region program concentrated on the eastern region's challenges and opportunities, state Treasurer Janet Cowell spoke of bold steps needed on the state level not only to ensure economic growth, but stability as well.

Ms. Cowell used North Carolina's Eastern Region's fourth annual State of the Region to stump for her tax reform proposal that includes reduction of tax credits and exemptions and reducing personal, corporate and sales taxes.

Such reform is overdue, she said.

She compared the state's failure to act on tax reform to how difficult it is for some people to take bold steps in their personal lives.

"That failure to act is not just limited to individuals and in this state I think there is a prime example of failure to act, as we have for years, and that is in tax reform," she said. "Over the last two decades, there have been, by my count, about seven different commissions and this year it hasn't had has much attention maybe so far because the budget deficit was looming for the state of North Carolina which is $3.5 billion more or less. I care about that budget deficit as much as anyone as treasurer, but I also, as the manager of the pension for this state and as manager for all the state debt, have innately long-term perspectives on finances.

"I believe that tax reform is critical to our economic prosperity and financial stability here in North Carolina. I also think that there is actually a connection between the budget deficit we are facing, this $3.5 billion, and failure of all of us to enact tax reform in the past. That is because our tax system has gotten on to a narrower and narrower base and is a very volatile revenue stream. I do not want to ride a tax revenue rollercoaster which is what we are all on today."

She noted the state's revenue dropoff, but still had some positive comments that the state should slowly recover from that dropoff.

"But this is going to be a really rough year," she warned. "The other thing that happens is not only the volatility of the tax system which is causing a lot of bad choices right now, but we have to keep increasing our rates, because as the base shrinks you have to raise the tax rate.

"We started with a 3 percent (sales) tax rate in the 1930s during the great depression. We stayed at 3 percent through 1991 and that recession. It has actually gone as high as 5.75 percent. So we have almost had to double that sales tax in the last 20 years just to keep the revenues stable just because we only tax products and goods. My goal would be to broaden (the sales taxes base) and reduce the tax rate at a target reduction of one percent in the rate."

For personal income taxes, people would still be able to deduct mortgages and charitable deductions, she said. It is similar to what has been proposed at the federal level, she added.

The next step would be to try to reduce the taxes and all of the tax credits, she said.

"I was just as guilty when I was a state senator. I would file tax credit bills and it is like they are all nice to have," Ms. Cowell. "You get a tax credit for recycling oyster shells, but how many average people understand, know and utilize this tax credit? It ends up being the folks with the expensive accountants and the fleet of lawyers. If we could simplify all of that, you could lower the personal income tax rate by one percent."

Tax reform, even if revenue neutral, would make it more profitable for business industry and families, she said.

The tax reform proposal would shift the base of personal income tax collection to adjusted gross income with a limited number of specific reductions. The state currently has a progressive income tax structure, broken into three brackets -- 6 percent, 7 percent and 7.5 percent.

A shift to adjusted gross income would broaden the tax base, which would allow for lower rates, she said. Also, the system is simpler to determine and makes for a less volatile revenue stream.

She noted that of the 35 states that levy a personal income tax that 29 used adjusted gross income as a baseline for state tax collection.

A second phase of the plan would be to broaden the sales tax base to include services as well as goods.