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In Kansas, tax reform isn’t exactly playing out the way some lawmakers had hoped.  The state that Grover Norquist once called “the starter gun for tax competition” has passed a series of income tax cuts over the past year with the stated goal of eventually eliminating income taxes altogether in the near future.  This “race to zero” is well underway in several states with conservative governors and legislatures.  Here’s a quick look at how that’s working out so far for Kansas:

A $2.5B budget shortfall

The Kansas Legislative Research Department is projecting a $2.5 billion revenue hole through 2018 because the legislature has yet to figure out an effective way to replace lost revenues as a result of the income tax cuts.

A threatened credit rating

Last month, a state court ruled that the Kansas legislature was breaking the law by underfunding public schools as a result of the income tax cuts, which prompted Moody’s Investors Service to warn of a negative credit risk for the state.

Less funding for public services

Concerns over the state’s credit rating aren’t the only thing that should give Kansans pause.  By starving public schools and other services critical to economic success, the state is jeopardizing future growth. Read More

North Carolina policymakers have pledged to make revenue modernization a legislative priority in 2013. Earlier today at a press conference, North Carolina Senate President Phil Berger indicated that there will indeed be a revenue reform package. At this point, it is not entirely clear which specific policy decisions and principles will guide the leglative leadership’s revenue plan.

With that said, Senator Rucho, the Co-Chair of the Senate Finance Committee, is touring the state and pitching a proposal that would eliminate the state’s personal and corporate income taxes. One of the arguments used in support of this proposal is that sales tax revenue is less volatile than personal income tax revenue. This is one of many persistent tax myths, however. And if this tax myth is used to guide policy decisions, the result could be even more problems with North Carolina’s tax code.

For sure, sales tax revenues are volatile in the face of economic downturns. This is especially true when the sales tax fails to include services. While Senator Rucho and others have claimed that the sales tax can deliver greater stability than other revenue sources, it is important to note that research demonstrates that the personal income tax is no more volatile than the sales tax in the long-term. Read More

Written by Cedric Johnson, Policy Analyst, NC Budget and Tax Center

North Carolina policymakers have pledged to make revenue modernization a legislative priority in 2013. The policy decisions that they make – and the principles that guide them – will be the foundation for how we collectively pool our resources to educate our children, protect our communities, and support economic opportunity for generations to come.

Since we began, the Budget & Tax Center has advocated for modernizing North Carolina’s tax system to make sure that community needs across the state are consistently met in good and bad times. We have analyzed and advocated for policies that would do so by asking all North Carolinians to contribute according to their means. In our work, it has become clear that tax reform that is truly modernizing can not only address our state’s fiscal challenges but also put the state back on a path to shared prosperity.

To be sure, the Great Recession and the subsequent policy choices made in the face of our state’s fiscal challenges have made all too clear the problems with North Carolina’s revenue system. Tax collections as a percentage of personal income are near a 40-year low for North Carolina, which challenges the state’s ability to adequately invest in important public structures. But beyond its inadequacy for our current and future needs, our tax system is out-of-date, upside-down, and unaccountable.

It is these practical problems —not theoretical ones — that policymakers must address in their efforts to pursue true and comprehensive reform.

Moreover, efforts to modernize the state’s revenue system must be guided by principles that are broadly recognized as indicators of a sound revenue system: adequacy, equity, stability and elasticity are primary among them, with simplicity and efficiency also being important.

  • Adequacy:  A tax system exists to provide for public services demanded by citizens. Both short- and long-term adequacy are critical to ensuring that the tax system can build the infrastructure of services that support communities and the broader economy today and in the future.
  • Equity: How tax policies impact households across the income spectrum as well as how they impact taxpayers similarly situated can impact citizen’s assessments of the fairness of a tax system as well as its ability to support important economic outcomes.
  • Stability: The predictability of a revenue stream is important to the planning and decision-making that policymakers undertake especially with regards to ensuring consistent and long-term investments that promote economic opportunity.
  • Elasticity: How a tax grows with the economy provides an important indication of how well the taxes can keep up with the demand for public services; this is why the elasticity of a tax is important to consider in the design of a tax system.
  • Simplicity: From an administration standpoint, and from the perspective of a citizen, it is important that a tax code be transparent. The degree to which tax loopholes are rampant is key to simplicity, not tax rates themselves – as some would suggest.
  • Efficiency: A tax system should not drive economic decision-making or provide preferential treatment for one type of economic activity over another — for example, investing over earning a wage.

Each of these principles will be highlighted in a series of blog posts this week and each will serve as guideposts against which BTC will assess tax proposals moving forward.

North Carolina cannot afford to forego comprehensive revenue reform that addresses the real problems with our revenue system nor can we afford to get this wrong. A modern tax system will be essential if North Carolina is to remain a leader among states: a leader that, in this century, must redouble our efforts to support an innovative economy that strives to expand opportunity for all.