NC budget chief: Problems with tax overhaul idea

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CHAPEL HILL, N.C. (AP) — Gov. Pat McCrory's top budget officer pointed out potential problems Wednesday with an idea floated at the Legislature to potentially eliminate North Carolina personal and corporate income taxes and apply the sales tax to many more services.

Deputy Budget Director Art Pope told reporters he's worried a preliminary tax pitch from Senate Republicans could be regressive and essentially double-tax older adults who paid income taxes and saved for retirement.

"Speaking personally, I have great concerns about that" idea, Pope said at a journalists' round-table at the University of North Carolina at Chapel Hill, making clear he wasn't necessarily talking for the governor. But he also pointed out McCrory ran in 2012 on a tax reform platform with an initial goal of reducing income tax rates to those of neighboring states like Virginia and South Carolina.

Pope said he's part of a working group in the McCrory administration looking at tax reform and recommending ideas to the governor. He declined to say what the group will recommend to McCrory and whether the governor will propose to the Legislature that it cut income taxes.

"When Gov. McCrory is ready to make an announcement on that, he will do so," Pope said.

The state's income taxes are among the highest in the Southeast. North Carolina's corporate income tax rate is 6.9 percent, while the individual income tax rate for the highest wage earners is 7.75 percent. McCrory and other Republicans say the rates are a liability in attracting new businesses to the state.

The Senate proposal — identified by Senate GOP leaders as a "concept" — envisions eliminating income taxes and replacing them with a broader consumption tax that would apply the sales tax to things like auto repairs, lawn care and professional services.

The combined state and local sales tax, which is 6.75 percent in most counties, would increase to less than 8 percent, according to Sen. Bob Rucho, R-Mecklenburg, who has been pitching the idea. The proposal also would restore the state's share of the food tax that was eliminated 15 years ago. Local governments currently collect a 2 percent sales tax on food. All businesses would pay a license fee and real estate transactions would be subject to a higher tax.

Pope, a former state legislator, retail chain executive and conservative philanthropist, said the state has a three-legged system of income taxes, sales taxes and local property taxes that, while containing various exemptions, is fairly balanced. Income taxes generate more than half the revenues needed for state government's annual $20 billion budget.

"To switch to a pure sales tax on all services, it almost becomes a gross income tax, a gross transaction tax without any regard to whether you're actually making any money," Pope said, adding that "I think that's going to hurt the economy. It is (also) regressive in nature, no doubt about it."

Pope's comments came the same day the liberal-leaning North Carolina Budget & Tax Center issued a report saying a proposal similar to what Senate Republicans are suggesting would give the wealthiest 20 percent of taxpayers a tax cut while low- and middle-income households would pay more.

The tax center's study analyzed a report commissioned by the John W. Pope Civitas Institute.

The institute is named for Art Pope's late father, and the family's foundation has given money to the institute. Art Pope was on the institute's board until recently. The Civitas Institute said that economist Arthur Laffer, whose firm evaluated the institute's proposal, will speak Thursday night in Raleigh.

Pope said Wednesday he expected McCrory to release his two-year budget proposal in mid-March. He said the state may see a $100 million revenue surplus at the end of the fiscal year June 30 but could see it evaporate if Medicaid generates another shortfall.

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