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Service-Based Taxes May Become More Common In N.C.

Posted November 30, 2006

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— North Carolina's tax system is based on a manufacturing-based economy and levies duties on goods. Over time, however, the state's economy has become more service-based.


Academic, business, and government leaders are looking for ways to keep up with growth, and some have advocated taxing more services.


Consumers buy goods, generating sales tax revenue, but now North Carolinians pay much more for services that generate little or no tax revenue.


Elaine Mejia of the nonprofit North Carolina Budget and Tax Center said she considers the state's system outdated.


"Talking about tax policy is always a challenge," Mejia said. "The reason we keep raising sales tax rates is because we don't apply the tax to services, so the base erodes over time."


David Thompson of the North Carolina Association of County Commissioners said the effect of a shrinking tax base trickles down to local governments, which are struggling to fund schools, infrastructure, and skyrocketing Medicaid costs.


"I believe it's going to take redefinition of how we collect revenue and also a redefinition of which level of government produces the different levels of services," Thompson said.


Broadening the sales tax to cover private services would generate revenue, but it would come with ramifications for consumers.


"The price going up would hurt the homeowner," said professional house painter Mark Randolph. "So that could impact me that way."


Still, Randolph said he understands that if revenue didn't come from taxing services, it would probably come from somewhere else.
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