Candidate Bob Etheridge talks with Greenville resident Betsy Leech during a meet-and-greet Saturday morning at Winslow's Tavern. Etheridge is running for the democratic gubernatorial nomination.

Rob Taylor/The Daily Reflector

Candidate Bob Etheridge talks with Greenville resident Betsy Leech during a meet-and-greet Saturday morning at Winslow's Tavern. Etheridge is running for the democratic gubernatorial nomination.

Governor candidates recognize tax reform’s challenge

The Associated Press

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RALEIGH – North Carolina’s candidates for governor are all for some kind of tax reform — a buzzword for more than a decade that has yet to translate into profound changes for a revenue system that has stayed mostly the same since the 1930s.

While some longshot hopefuls have offered dramatic ideas, the leading gubernatorial candidates are more restrained with how they’d change a tax code more suited to a manufacturing-heavy economy of textiles and furniture than today’s fast-growing service and technology sectors.

In response to an Associated Press questionnaire, those candidates preferred to give their philosophy on tax reform — a reflection of the difficulties associated with gaining consensus on a solution over the years despite several study commissions.

“I have no illusions that this effort will be easy or painless,” wrote former U.S. Rep. Bob Etheridge, a Democratic primary candidate. “My approach as governor, rather than just ‘endorsing’ a tax reform plan, will be to bring all the players ... together to create a system that is both predictable and fair to all.”

N.C. Lt. Gov. Walter Dalton, who’s been serving at the legislature since 1997, said an incremental approach is required out of political necessity.

“On this issue, I believe in evolution, not revolution,” Dalton said. “As we’ve seen in the past, comprehensive reform is nearly impossible to pass in the General Assembly.”

Business leaders, fiscal number-crunchers and elder statesmen on both sides of North Carolina’s political aisle have tried for years to build momentum to retool the tax code. Legislators have made little progress.

Here’s the issue: sales taxes, which were first instituted in North Carolina during the Great Depression, comprise a decreasing percentage of overall state tax revenues, even as the percentage rate has continued to climb. Sales tax revenues are susceptible to wide swings during booms and busts. The individual income tax is also generating an increasing proportion of the tax pie but the rate for the highest wage-earners is the highest in the Southeast. Business leaders argue the rate is a disincentive for companies to move to North Carolina.

The solution, according to experts, is to broaden the items subjected to the sales tax — most importantly services that are now exempt — while lowering the sales tax percentage rate overall. The same thing could be done for corporate and individual income tax rates while closing what critics call loopholes. The result, the argument goes, is more stable tax collections that discourage large surpluses and shortfalls.

Any changes are bound to create an industry or group of people unhappy with having to pay more taxes.

“There’s been a small group of legislative folks that have been interested in reform without the governor necessarily buying in,” said Roby Sawyers, an accounting professor at North Carolina State University. “Really, for it to work you’ve got to have commitment from the Legislature, you’ve got to have commitment from the governor and you’ve really got to have commitment from the other stakeholders as well.”

Last year, the new Republican majority took a small step by agreeing to change the basis upon which state income tax is calculated by using a key income figure on a taxpayer’s federal return.

Pat McCrory, the leading candidate among six for the Republican nomination, said he wants to create a tax code that “should be up to date with a 21st century economy” and would focus upon reducing income taxes first and consider closing “tax loopholes.”

“Republicans and Democrats need to put politics and special interests aside and work together for the creation of a more fair and modern tax code which rewards productivity, innovation and creates jobs,” the former Charlotte mayor said.

Alexandra Sirota, director of the liberal-leaning North Carolina Budget & Tax Center, warned that income tax changes alone would only shift tax contributions to other sources or other groups — leading to higher sales taxes or significant government cuts that would harm low-income residents the most.

State Rep. Bill Faison, a Democratic candidate, blamed Republicans for a 2011 law that held back the power of the state Department of Revenue to recalculate a multistate corporation’s in-state profits for tax purposes. Faison said nearly two-thirds of a certain kind of corporation paid no state corporate income taxes, and there are too many tax breaks for big business.

“The criteria for reform should be doing the most good for the most people,” Faison wrote.

Dalton pointed to efforts at getting more Internet-based companies located out of North Carolina to charge sales tax for products as a North Carolina store would as another step toward reform.

Republican candidate Paul Wright of Dudley is pushing a plan that would give voters in all counties the right to hold a referendum to abolish their property taxes. If the referendum passes, Wright said, the counties could replace them with an income or sales tax. Fellow GOP candidate Jim Harney of Fayetteville also wants to replace the property tax with a flat-rate income tax with revenues distributed to state and local governments.

“It should not matter if you make one dollar or a million dollars, everyone should pay the same percentage,” Harney wrote.

Libertarian Barbara Howe of Oxford said people need to understand that taxes have never been fair and won’t be until the rate is zero. The problem, she said, is state government spends too much.

Democrat Bruce Blackmon of Buies Creek is keeping to his one-plank campaign platform he said ultimately will decrease pressures to raise taxes. He wants to create a state endowment by investing annually a portion of profits from the North Carolina Education Lottery.

Democrat Gary Dunn of Matthews and Republican Charles Kenneth Ross sounded disturbed by high taxes and gas prices. The state gasoline tax rose nearly 4 cents on Jan. 1 to almost 39 cents per gallon. The gas tax automatically adjusts twice a year based on the wholesale price of gasoline.

Democrat Gardenia Henley of Winston-Salem said she has a master’s degree in taxation and would review the tax code for simplifications and restructuring as part of a broad budget review she said she intends to complete when elected. “Raising taxes should be a last resort,” she wrote.

Sirota said she’s hopeful the struggles by outgoing Gov. Beverly Perdue and legislative leaders to restore revenues to levels seen before the most recent recession will spur elected officials on to create a tax system that is equitable and stable for decades to come.

“My biggest fear would be to have another conversation without action,” she said