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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 But beyond its inadequacy for our current and future needs, our tax system is out-of-date, upside-down, and unaccountable.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.