Tax rates, breaks take center stage in gubernatorial race

Posted September 13, 2012 10:20 a.m. EDT
Updated September 14, 2012 1:28 p.m. EDT

— Neither Democrat Walter Dalton nor Republican Pat McCrory need much of an excuse to hammer each other over taxes. 

The two leading candidates for governor both claim they have the formula that will spark North Carolina's flagging economy, and both say the other's tax policies will be disastrous.

McCrory has repeatedly criticized Dalton for his votes to raise taxes while he was a member of the General Assembly and for embracing Gov. Bev Perdue's call earlier this year to raise the sales tax to offset cuts to education.

Dalton, in turn, has said that McCrory's tax reform plans would harm lower income people and small businesses.

"He talks about let's increase consumption taxes, let's consider the tax on services," Dalton said during a Raleigh press event primarily aimed at rolling out his own economic proposal. "You talk about something that will hurt the middle class, you talk about something that will hurt our senior citizens. If you take that tax burden and reallocate it in that fashion, it will kill our small businesses."

Dalton was referring to comments that McCrory made, saying that the Republican would like to see corporate and income tax rates lowered.

Barbara Howe, a Libertarian, is also on the November ballot. 

"People who earn money ought to be able to keep it and not send it to Raleigh for politicians to divvy it out," Howe said. She breaks with Dalton and McCrory on a number of issues, saying that their plans for economic and tax reform delve into areas that government ought to stay away from. However, with Howe's poll numbers in the single digits, Dalton and McCrory have focused their criticism on one another. 

The back and forth between the Republican and Democrat has highlighted where their tax plans depart from the conventional wisdom around tax reform. In fact, Dalton's criticism of McCrory runs counter to the idea of "broadening the base and lowering the rate" that has been the basis of legislative tax reform discussions for more than a decade. Meanwhile, McCrory's plan offers broad outlines but few specifics.

Lower, broader tax base provides blueprint for reform

"I do think there are some general truths about tax reform," said Roby Sawyers, an accounting professor at North Carolina State University.

In general, he said, accountants and economists agree that lowering income tax rates while eliminating exemptions for certain groups and individuals would make the system simpler and more stable. At the same time, broadening the base of items to which sales tax applies – including services – while lowering the rates would even out swings in tax revenue.

"If you look at our rates across the board, they're pretty high," Sawyers said. Lowering those rates would make the state more attractive to businesses and make it easier for individual income tax payers to predict what they'll pay every year. 

This idea of "broadening the base and lowering the rates" has been part of Raleigh tax reform discussions for more than a decade. 

For example, a 2002 commission appointed by Gov. Mike Easley, which was headed by now-UNC System President Tom Ross, also suggested broadening the sales tax to cover services while simplifying income taxes.

"I'm now administering the laws that I helped to pass," said David Hoyle, a former Democratic state senator who now heads the Department of Revenue. "And to be real honest with you, I helped screw some of them up real bad."

During his tenure, Hoyle said, he served on a number of commissions and committees that put forward ideas to lower rates and close loopholes. The problem, he said, was in mustering the political will to pass those plans. 

"It's not possible to have tax reform without winners and losers," Sawyers said. Some tax breaks benefit powerful special interests who will lobby to keep them, while other tax breaks may favor low-income people.

That dynamic can be seen in this year's gubernatorial campaign. 

Candidates go back and forth on tax breaks

Dalton has been critical of McCrory's call to consider broadening the sales tax base to include some services, something that experts agree would be a likely part of any tax reform effort. Asked about this, Dalton said he would like to streamline sales taxes and close loopholes. Later, a spokesman clarified that Dalton disapproved of any call to tax services.

"Service taxes are on the table for McCrory. Not Dalton," said Dalton spokesman Schorr Johnson in an email.

Dalton's economic plan does not lay out an overhaul of the state's tax system, but it does include a tax break for small businesses. It also calls for closing roughly $9 billion in tax expenditures, better known as loopholes and tax breaks for specific people and businesses. 

He questions the effectiveness of those breaks in driving revenue and jobs to the state.

Many of those breaks were meant to entice people to buy certain kinds of services or businesses to expand in the state. Asked for an example, Dalton said a break for those who buy long-term care insurance doesn't seem to be inducing people to buy that product.

Closing loopholes does fit into the schemes described by Sawyers and others. But Sawyers cautioned that any governor leading the charge to close loopholes will face an uphill battle. 

McCrory does not address such loopholes in his "North Carolina Comeback" plan.

"He's not getting into that as an isolated item," said Brian Nick, a consultant for the McCrory campaign. "The goal needs to be that the system is simple and transparent. Clearly, loopholes could get in the way of simplicity and transparency," Nick said. 

McCrory does call for lowering the individual and corporate income tax rates, but he does not say how he would make sure the tax system raised roughly the same amount of money as it does today. Dalton has been critical of that lack of specificity. 

"He doesn't have a line in the sand," Nick said of McCrory. "It's definitely something he's talked to a lot of smart folks about." 

Both parties play to military, farm communities

Both Dalton and McCrory talk about the need to foster North Carolina's relationship with the military and help businesses take advantage of the military presence here in the state.

And both pay respect to farms and farmers in their plans. 

Dalton's plan is more detailed, but the biggest difference may be that of tone. 

Dalton talks about "refocusing" policies and programs and building on existing policies.

"Although we may still be years away from regaining all of the jobs lost from the nation’s financial collapse, North Carolina is moving forward. Let’s build on this momentum and create a better, brighter and stronger North Carolina together," Dalton writes.

Many of McCrory's proposals are standard GOP promises, such as making government regulators more friendly to business. And he is far more critical of the state's current economic situation than Dalton, saying that North Carolinians need to "fix our broken economy." 

Other states, McCrory writes, "are reforming and successfully competing for jobs, while North Carolina remains stuck with the fourth-highest unemployment rate in the nation."