Commentary: A view of tax reform - from North Carolina

The Charlotte ObserverFebruary 9, 2013 

All the talk about changing North Carolina’s tax code can make your head swim. Politicians and think tanks have diverse opinions about what to do. They are, naturally, influenced by their ideology, and in some cases one group’s “facts” are in direct contradiction of another’s. I wanted to get beyond that circle.

Most N.C. politicians of both parties agree North Carolina needs to reform its antiquated tax system. It was devised 80 years ago and hasn’t kept up with changes in how people work and spend. So it needs to adapt to an economy based less on manufacturing and agriculture and more on services and the Internet.

What would you want from a new tax code? I’d want it to produce enough revenue for the state to meet its needs; I’d want it to be stable amid the economy’s ups and downs; and I’d want it to distribute the tax burden fairly. An additional priority, and apparently the legislature’s highest: A tax code that makes North Carolina more attractive to business, which helps boost the economy and create jobs.

So how do you do that?

Republican Sen. Bob Rucho, a Matthews dentist who is co-chair of the Senate Finance Committee, and Senate leader Phil Berger floated a plan that would eliminate the corporate income tax and the personal income tax while raising the combined state and local sales tax to 8.05 percent and making other changes. Rucho and Berger said that would lure new companies and create jobs at existing ones.

People who have been on the front lines of recruiting businesses to North Carolina say it’s not that simple.

“There’s no one single tool which dominates. You can’t fix taxes, fold your arms and watch the companies come in your borders,” Keith Crisco, who just finished four years as secretary of commerce, told me last week. “It’s a portfolio of things.”

Crisco convened focus groups featuring executives of companies that came to North Carolina and those who snubbed us, companies that expanded here and those that considered expanding elsewhere. Those focus groups, “plus a thousand conversations over four years with business people looking at North Carolina,” gave Crisco a good idea of what businesses want and need.

At the top of the list: A trained workforce. Companies such as pharmaceutical maker Novartis and vehicle supplier Linamar opted for North Carolina despite our higher corporate income tax rate because they knew they would be able to hire the trained workers they needed.

Right behind that: Relief from regulation, and Crisco said that’s about helping companies complete the permitting process quickly. “Most businesses understand the need for regulations, but don’t want to wait a year to get through it,” said Crisco, a Democrat who owns an Asheboro elastics company with 230 employees. He recalled a brewery that chose North Carolina because it got all its permits in three months, instead of the 18 it would have taken in a competing state.

Taxes matter greatly too, of course. Crisco said some companies suffer “sticker shock” when they see North Carolina’s 6.9 percent corporate income tax rate. But eliminating the tax goes much further than necessary. By trimming its rate to 4 percent, North Carolina would fall from one of the highest rates in the South to one of the lowest. That, Crisco said, would easily be sufficient to make North Carolina competitive.

Carroll Gray, who recruited business as head of the Charlotte Chamber for 21 years, agreed. “You don’t have to get rid of the corporate income tax,” Gray told me. “You just need to be in the bottom 25 percent and North Carolina can compete.”

There’s a lot to consider in tax reform beyond what will best attract businesses here. But legislators could improve the business tax climate without the sledgehammer of eliminating corporate and personal income taxes, and without shattering the rest of the state’s revenue picture.

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