Principled Tax Reform

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Principled Tax Reform

Special Report - October 23, 2012
The Civitas Institute has outlined a set of five guiding principles state lawmakers should keep in mind if and when they tackle the issue of tax reform. In the October 22 report, “5 Principles to Cut Through the Noise on Tax Reform,” Brian Balfour briefly sketches North Carolina’s economic landscape. North Carolina’s 9.7 unemployment rate ranks fifth in the nation. The Tax Foundation has ranked North Carolina’s business tax climate as seventh worst in the nation. The report asserts that “job and income growth in the private sector have been stagnant this decade,” as the state has fallen behind both the regional and national averages. Legislative leaders have indicated, and pundits agree, that some form of tax reform will likely be debated in 2013.

In light of the probability of tax reform receiving consideration during the next session of the General Assembly, the Civitas Institute report outlines five principles that it argues would create “a Sound North Carolina Tax Structure”—growth enhancement, neutrality, stability, transparency, and simplicity.

The report describes a “growth enhancing” tax policy as one that is “most conducive to economic growth, job creation, opportunity and increased financial prosperity for all North Carolinians.” In particular, such a policy “would encourage capital investment and make North Carolina more competitive at attracting existing businesses into the state, encouraging more new domestic businesses, and fostering expansion of existing businesses.”

The second principle promoted in the report—neutrality—seeks to “minimize distortions to economic decisions made by households and businesses.” The neutral tax policy advocated for in the report would forego favoring “certain industries, activities or products,” and thereby be more “able to adapt and diversify in concert with an ever-changing, dynamic marketplace rather than being heavily concentrated and tied down to specific industries favored by a biased tax code.”

This model tax structure should limit “fluctuations of revenue during economic booms and busts.” The report stipulates that such stability in the level of government funding would “help budget writers avoid future tax rate changes and significant changes in state agency appropriations.”

According to the report, tax reform and tax policy should be “clear, consistent and predictable”—in a word, transparent. Finally, the report advocated for a reformed tax code that results in an end product that is “easily understood by taxpayers” with minimal compliance and enforcement costs, brought about in part by an increase in voluntary compliance thanks to simplicity in the system that “limits the incentives to engage in tax-avoidance activities.”

Related resources:
Taxmageddon Draws Closer - August 22, 2012
Tax Freedom Day Arrives - April 18, 2012
Report Says NC Tax Reform Needed - April 10, 2012
North Carolina Over-Taxed - February 3, 2012
Benefits Abound from Lower Taxes - May 17, 2011
Squeezing Families: How Expanding Government Undermines the Family - FNC - Fall 2010
NC Leads in Tax Increases - January 19, 2010
North Carolina’s Entrepreneurship Ranking - December 31, 2009
Report Says NC Tax Eighth Highest - October 27, 2009
Tax Policy, Marriage, and the Family - FNC - Fall 2006