Thursday, February 11, 2010

Without tax reform, is NC bond rating at risk?

State Treasurer Janet Cowell, speaking Wednesday night to the annual dinner for the Centralina (NOT Metrolina) Council of Governments, said something that perked up my ears considerably.
She said, in response to a question from Belmont Mayor Richard Boyce, asking what the role of the state treasurer is in comprehensive tax reform:

Cowell said that in talks with bond rating agencies N.C. officials were told that they want the state to reform its tax structure, so it's more stable. Without reform, she said, we could be put on a watch list. Cowell says she told this to N.C. Senate Majority Leader Martin Nesbitt, D-Buncombe. "I don't think we have the luxury of doing nothing," she said.

Here's why this should be of interest to more than just tax policy geeks (I plead guilty to being one). The state's revenue system, which depends primarily on income taxes and sales taxes, was set up in the Depression. It doesn't recognize the many economic changes that have taken place in the 80 years since then - the loss of manufacturing, the rise in the service economy, the explosion of online commerce (most of it untaxed). The sales tax is among the most volatile of taxes, fluctuating greatly when times are good, or bad. Income taxes are less volatile but still show big dips and surges depending on the economy's strength. (Update: 4:45 PM - State Sen. Dan Clodfelter tells me that the problem in North Carolina is that income tax revenue is more volatile than sales tax. "The single most volatile, unpredictable, unreliable tax is the corporate income tax, and that fact has nothing to do with exemptions, loopholes, concessions, or anything of that ilk," he e-mailed me. He's a major mover pushing for tax reform and wants to do away with the corporate income tax.)

The state keeps going to those same buckets - sales taxes on goods, and income taxes. A tax reform proposal in the legislature would lower the general sales tax rate but extend the sale tax to some - not all - services. It would do other stuff, such as tinker with business privilege license taxes - which has alarmed the folks at the city of Charlotte, which gets about $16.6 million a year from that little revenue stream.

The upshot of all this is that many states have attempted comprehensive tax reform and few have succeeded. Every business with a loophole fights like mad to keep it. Because the reform would raise some taxes and lower others, some of the "I'm anti-tax" blowhards take up sloganeering against it on grounds that it raises taxes, carefully neglecting to mention that some taxes go down (like, say, the overall sales tax rate).

But for Cowell to weigh in with the specter of bond rating repercussions does imply that folks in the power offices in Raleigh are taking this reform effort seriously. Or at least, that they ought to.
(And if you're still with me here, you are clearly a tax policy geek, too, in which case you'll enjoy the latest State of the States 2010 report from the Pew Center on the States.)


JAT said...

OK, I'll play.

Give me three specific loopholes that should be closed.

And I recently paid the state of NC a little over $5 to download a subscription extension to my anti-virus software -- a product NOT available in a brick-and-motor store. Exactly what services did the state of NC provide in exchange for my $5?

And you should also note that Cowell recently noted that NC's willy-nilly debt explosion is at least as likely to lower the state's debt rating as any supposed revenue drain that a net tax hike ("reform") would address.

Mary Newsom said...

Jeff, I can't cite you loopholes this moment because I'm busy on other things. I'll try to get to that later. Cowell didn't say the ONLY threat was lack of tax reform, of course.

And from her remarks it sounded as if the problem was as much the stability - and hence, unpredictability - of the revenues as it was the size of the revenues. Both, obviously, are important.

Anonymous said...

The services the state provided for your 5 dollars is simple - they built the roads that allowed the cable company (or internet service provider) to access polls to build the infrastructure to get you internet. They provided the plows that cleared the roads during a bad disaster so that service trucks could fix your faulty line, etc etc.

More importantly, that five dollars went to the HANDS OF GOOGLE with the 'state tax incentives' they gave to them in Lenior, NC.

Anonymous said...

The state collects more than enough tax revenue. The people in Raleigh just don't know how to manage our money. They would rather spend wildly rather than exercise any fical restraint.

Anonymous said...


Step 1: Repeal the state income taxes (both personal and corporate) and implement a North Carolina-specific FairTax. Doing so will reinforce Step 0 precisely because sales taxes are volatile -- it means that Raleigh can't keep spending worse than drunken sailors. It also means that we won't have to offer Google, Dell, etc. gazillions of dollars in tax incentives since the corporations will not be taxed.

I won't go into further details about the FairTax, but you can read about it at (although that is focused on a national consumption tax, not a state-by-state one.) The benefits that would accrue to the nation by implementing the FairTax would acrrue proportionately to North Carolina if state taxes were replaced by a state FairTax.

Anonymous said...

Folks of more liberal ideology won't want to hear this, but I'm going to say it anyway. Increasing taxes never - let me repeat, NEVER - increases tax revenue. Even liberal John F Kennedy realized this, and federal tax revenue sharply increased when he lowered taxes. Same thing happend 20 years later when Reagan lowered taxes.

Not one penny of income should ever be taxed for any reason. However, the liberals did a phenomenal job of creating and hyping class envy, dating all the way back to the Civil War, to get income taxes legalized. They convinced the public initially that only the very rich would get taxed. (Let's remember, everyone that has more money than you got that money wholly and only through dishonest means. Also, everyone with more money than you gets out of bed in the morning for one, and only one, reason - to ruin your life and take whatever money you have. And every cent of the more money they have than you will be spent only on the selfish pursuit of mega-luxury.) The American public has bought into this so thoroughly that it is now an accepted mentality that the more money someone makes, the less they keep, and that the most liberal people are able to convince the masses that the current structure still isn't enough, but that the evil, dirty, filthy, evil rich need to pay even more.

The sales tax would work better if it were consistent (1 rate for every sale, as opposed to one rate for prepared food, another for car rentals, still another rate for hotel stays, still another for a county using it for mass transit building, etc.).

So lower it. Lower all income taxes for every person and business. The more of their money that people are allowed to keep, the more they will spend - we are Americans, after all; we love to spend money.

Anonymous said...

anon 02:07 - I like the FairTax also. I believe we can get to that point one day. We can start heading down that road by substantially lowering taxes now.

Anonymous said...

They are DEMOCRATS, got it!

Anonymous said...

Legalize refer and tax the ever-loving God out of it.

consultant said...

These are the same GANGSTER bond rating agencies that were/are in bed with the big GANGSTER banks (BOA is up at the top of that list).

These rating agencies lost their independence and integrity a long time ago. Right now we're all playing games with each other. Acting like the major players are still observing something like "rules".

Maybe 30 or 40 years ago that would have been a legit warning from the rating agency. Today, it's a way they make money on the back side from deals the State Treasurer isn't privy to.

We're not even trying to act transparent anymore as most of the major financial players have become criminals over the last couple of decades. They operate without fear of prosecution having bought off weak Democrats and put in office Republicons who never saw a back room deal they didn't like.

Spend some time in Central America. Our financial system today is a lot like theirs and getting closer everyday.

The only difference between Greece and us is that our debt explosion is way bigger and nobody can/will bail us out. The Feds are trying to fix what they help create (thank you Alan Greenspan-Republicon) but the Republicon/weak Democrat debt party was way too big and went on for way too long.

We don't have many leaders with integrity and a strong civic sense. That's mostly all gone. We've become a nation of hustlers with an eye for fast cash and the easy way.

When the severe cutbacks come, watch out.

Anonymous said...

Get real ! There is not a tax system anywhere in the world that would satisfy the spending appetite of these lefties. Mary says tax "reform" - she means tax "raise".

Also, an entire article without a single reference to your Haaaavvad education. Must be on a per word limit on this article.

Jumper said...

The so-called Fair Tax opens up more loopholes than ever. Government bureaucrats would even more rigidly define what is "wholesale" and "retail."

If you decided to pay employees squat but gave them "gifts" that would be exempt.

This is how a 12-year-old would come up with a tax system. It's simply not serious.

Pathmaker said...

Keep in mind the deepest deficits happened during Republican administrations. When the Clinton administration handed over the reins, the federal budget was running in the black for three years with surpluses projected for years to come. When Bush handed over the reins, the federal budget was running record deficits. See the table from the CBO.
So one could conclude that lowering taxes runs up the deficit and does not general more revenue. Check the Reagan years.

JAT said...

Anon 1:42:00 PM

The state/locality already collects gas tax for road building, franchise fees/ROW fees and property tax for such utility infrastructure, not to mention $12.75 a MONTH in tax for my broadband service.

What additional INCREMENTAL burden did I place on state and/or local government by downloading 100MB of software?

Please copy your response to Dan Clodfelter.


Anonymous said...

Pathmaker, your post may be correct if you adjusted for spending. Spending did not remain constant; it significantly increased under Reagan, under W, and certainly under Obama.

I can run 10 miles per day, rain or shine, hot or cold, but if I go from eating 3 salads a day to eating 5 big macs a day, I'm still going to be a lardbutt.

Anonymous said...

Hey Mary. If it weren't for the anti-tax "blowhards" there's no telling how high taxes would be in North Carolina. Check out the link below:
It seems NC government is truly out of touch with its citizens when you consider that this state raised sales, income, and corporate taxes in 2009, something no other state in the southeast had the nerve to do. And the only advantage I see that NC has over any of these other states is an excellent University system which also raised tuition rates in 2009, (an additional "tax" for those of us that will be sending kids to college in coming years). Looks to me like the State treasurer is the true "blowhard". Maybe she should consider spending within the limits of the state's revenue stream... Something real people have to do every day...

Mary Newsom said...

For the record, addressing Anon 5PM, Cowell never recommended higher taxes. As state treasurer, her job is to keep the state's finances sound.

Tax reform might mean higher overall revenues, or it might be revenue neutral. That's for the pols to decide. What it would do is raise taxes on some things, lower them on other things and - if done well - spread the tax burden more equitably.

Anonymous said...

So the problem with the bond rating is the tax collection, not the spending, right? BS!

WashuOtaku said...

Anonymous said...
"Legalize refer and tax the ever-loving God out of it."

Anon, you may not realize this, but the state of North Carolina does tax 'refer' or simply marijuana. You can go to the Dept. of Revenue and purchase a tax stamp for your marijuana at anytime.

Now, the kicker is it's still illegal to have marijuana (don't worry though, the revenue department have a don't ask/don't tell policy, you can still be a good tax paying citizen while breaking the law). So when the police bust you while you smoking, they ask if you paid your tax on it too... if not, that's another charge for tax evasion and that money goes to the Dept. of Revenue. Ta-Da!

Who said you can't have cake and eat it too.

Anonymous said...

Mary, this is Anon 5:00. But the treasurer does not advocate that the state spend within its means to maintain AAA? More logical approach than the political hot potato of sweeping changes to the tax system. But then again, when do politicians take the logical route. And BTW, I don't want to be lumped into the anti-tax "blowhard" crowd as I consider myself extremely liberal AND fiscally responsible. It can happen...
I think its also clear that at the Federal, State, and Local level spending is totally out of control. Greece just got knocked around by the bond rating entities and unfortunately this country, (the USA), may be marginally more solvent or maybe not. We just keep printing money when we want to spend more and Greece, as a member of the EU, can no longer do that. Maybe the state treasurer should advocate for a North Carolina dollar... we can reopen the Mint.

Anonymous said...

Drive through Piper Glen. Then check the real estate records for Char/Meck. count the homes worth more that a half a million dollars. Count the homes worth more than a million dollars. Then go up to Lake Norman and count the big boats. Now tell me again how the rich people are not allowed to keep their money.

Ask your primary source of information; Glenn, Rush, Sean, or Bill how much money they made last year after taxes.

Poor rich people. My heart goes out to them.

Anonymous said...

The problem is that if legislators go to change the tax system noone in their right mind will believe them when they say they will keep it "revenue neutral". Just like they said the tax will be temporary.

You know these guys Like Clodfelter - cant help themselves. They wont be able to leave money on the table.

they will cause people to pay more taxes in total one way or another.

Jumper said...

Anonymous said...

Inflation the hidden tax. No poltician or newspaper editor ever mentions the word.

Anonymous said...

Junk Bonds.

Anonymous said...

People should 'starve the beast' as much as they can by withdrawing their tax dollars from the system as much as possible.

Once the federal and state governments collapse in to fiscal ruin, a better system can be built upon the ash heap of the old one. The ashes from a fire make great fertilizer.