Transcript Corporate Scandals and Scoundrels

Financing the Future:
Fiscal Modernization in
North Carolina
Roby B. Sawyers, CPA, Ph.D.
College of Management
Background

North Carolina’s tax system was largely set in
place in the 1920s and 1930s.

While it was a model tax system then, it is not
sufficient for North Carolina today or in the
future

North Carolina is changing - we are growing,
growing older, and becoming more diverse.
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North Carolina in the Year 2030
The population of North Carolina is growing rapidly
Population of North Carolina
13,000,000
9,000,000
5,000,000
2000 2005 2010 2015 2020 2025 2030
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North Carolina in the Year 2030
Yet population growth is not evenly distributed
across the state.
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North Carolina in the Year 2030
Millions
And the population is aging, especially in rural areas.
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7
6
5
4
3
2
1
0
65+
School Age
W orking Age
2005 2010 2015 2020 2025 2030
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Major Expenditure Trends
Medicaid expenditures have risen rapidly and
will continue to rise as the population ages.
Past Medicaid Expenditures
$8,000,000,000
$7,000,000,000
$6,000,000,000
$5,000,000,000
$4,000,000,000
$3,000,000,000
$2,000,000,000
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$1,000,000,000
$-
Major Expenditure Trends


The cost of higher education will rise.
The cost of new schools will be concentrated
in rapidly growing urban areas.
Billions of $
14.0
10.0
6.0
K12
Higher
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2005
2010
2015
2030
Major Expenditure Trends

2.4 million new residential housing units
by 2030.

$30-$60 billion financial gap for new
infrastructure.
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State and Local Responsibilities

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There are state responsibilities where
shortfalls occur (adequate funding for
roads & schools).
There are local responsibilities that are
inappropriate (Medicaid).
There are local responsibilities that might
be appropriate (roads in urban areas)
but lack a source of revenue.
The Revenue Outlook

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These demographic changes,
expenditure trends and changes in the
NC economy have resulted in a
projected “structural deficit” - tax
revenues are not able to keep up with a
growing economy and basic
expenditures.
Local Government Revenue
Outlook

Local governments struggle to pay for
needed services as more responsibilities
are mandated without corresponding
new sources of revenue.

Local governments are not able to
provide uniform levels of services across
the state.
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State Revenue Outlook
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Over the last twenty or so years, state
lawmakers have enacted a series of
temporary? sales tax and income tax rate
increases to deal with budget shortfalls.
While we may have a surplus this year,
Much of that excess is non-recurring and
Growth in revenue is volatile
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%
State Revenue Growth
14
12
10
8
6
4
2
0
-2
-4
1975
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1980
1985
1990
1995
2000
2005
The Facts: NC is not necessarily a
high tax state although our tax burden
is high compared to other SE states
Taxes as a % of Income - 10%
(Ranked 28th in nation)
GA: 9.8%
SC: 9.7%
VA: 9.7%
FL: 9.2%
TN: 8.3%
Source: Prof. Michael Walden, NC State
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NC Taxes as a % of Income and
National Rank
10.2
0
10.1
5
10
10
%
9.9
9.8
15
9.7
20
9.6
25
9.5
30
9.4
9.3
35
9.2
40
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03
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02
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%
Rank
2005 RESULTS: TAXES PER
CAPITA
$3268 per person
Ranked 30th highest in nation
Lower than VA, GA, FL
Higher than SC & TN
Source: Prof. Michael Walden, NC State
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N.C. State and Local Taxes Per
Capita, 2005$
3400
3200
3000
2800
2600
2400
2200
2000
1992
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1997
2000
2004
2005
N.C. FEES AND CHARGES - 2004
Per capita: $1038
Ranked 2nd highest in SE behind SC
% of income: 3.6%
Ranked 2nd highest in SE behind SC
Source: Prof. Michael Walden, NC State
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SPECIFIC TAXES – PER CAPITA
Tax
Property
Sales
Individual Income
Corporate Income
Rank in SE
(2004)
5
5
2
1
Source: Prof. Michael Walden, NC State
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SPECIFIC TAXES - % OF
INCOME
Tax
Rank in SE
(2004)
Property
5
Sales
5
Individual Income Tax 1
Corporate Income Tax 2
Source: Prof. Michael Walden, NC State
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BUT – TAXES CAN’T BE VIEWED IN
ISOLATION
Studies show public spending on education,
roads, and public safety can promote
economic growth and counter impact of
taxes
Source: Prof. Michael Walden, NC State
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NC IS A LEADER IN “CORE”
SPENDING
Public spending on education, roads, and
public safety as a % of own revenues
NC: 58%
National average: 53%
NC is 2nd in SE
Source: Prof. Michael Walden, NC State
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%
NC Core Spending as % of Total
Own Spending
58
57
56
55
54
53
52
04
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Changes in Sources of Tax
Revenue
Percent of Total NC State and Local Tax Revenue fro
Various Sources
1957
2002
Sales Taxes
41.4%
34.8%
Property Taxes
26.8%
24.0%
License Taxes
11.0%
4.0%
Individual
Income Taxes
10.5%
32.2%
Corporate
Income Taxes
9.1%
3.0%
Other Taxes
1.2%
2.0%
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NC Depends Heavily on the Income Tax
North Carolina
U.S.
Corp Net
Income
5.9%
Other
Taxes
4.0%
Property
2.0%
General
Sales &
Gross
Receipts
32.7%
Selective
Sales
16.2%
Licenses
5.9%
Individual
Income
45.2%
General
Sales &
Gross
Receipts
24.7%
Individual
Income
33.7%
Licenses
6.9%
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Selective
Sales
14.9%
Other
Taxes
1.2%
Corp Net
Income
6.8%
Problems with the Income Tax
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•
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Volatile
Depends on “bracket creep”
Uncompetitive rates: High rates, paid by
small businesses operating as
proprietorships, owners of flow through
entities as well as individuals
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Problems with the Sales Tax
•
•
Discriminates against manufacturing
(services are largely not subject to tax)
Relies on a shrinking base
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The Sales Tax Base is Shrinking
The sales tax base is shrinking as percentage of
the economy.
Percent
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79
28
84
89
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99
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Personal Consumption Expenditures
1979 and 2004
Total Expenditure
Durable Goods
Autos
Furn & Household
Other Durables
Nondurable Goods
Food and Beverage
Other Nondurables
Services
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1979
Percent
100.0
13.4
5.9
5.2
2.4
39.1
20.3
18.8
47.4
2004
Percent
100.0
12.0
5.4
4.3
2.3
28.8
13.8
15.0
59.1
Financing the Future

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How should North Carolina go about
financing its future?
That was the question posed by NC
State’s Institute for Emerging Issues at
its February 2006 Emerging Issues
Forum.
Three themes surfaced from the forum: A
sound tax system should be:
Sufficient,
Efficient, and
Equitable.
Financing the Future

Conclusions from IEI’s work
Tax reform must be comprehensive
and should include base broadening
and rate reductions.
Local governments need autonomy
and flexibility to respond to their
specific needs.
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Fiscal Modernization
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Largely as a result of the IEI’s work,
Governor Easley and the General
Assembly created a State and Local
Fiscal Modernization Study Commission
in August 2006.
Fiscal Modernization

The Commission’s charge is broad and
includes:
 recommending ways to modernize and
restructure North Carolina’s tax code;
 examining and making recommendations
with respect to state and local government
revenue sharing and taxing authority; and
 examining and making recommendations
with respect to the division of responsibilities
between state and local governments.
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General Tax Recommendations
1.
2.
3.
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Tax reform must be comprehensive in
order to be successful.
Income and sales tax bases should be
broadened and tax rates should be
reduced so that overall changes at the
state level are revenue neutral.
To the extent that base broadening
results in increased burdens for lowincome taxpayers, the State should
provide a mechanism to offset this
increase.
Recommendations: Income Tax
• Broaden the individual income tax base,
reduce individual rates and eliminate tax
filing and payment responsibilities for low
income taxpayers
• Reduce the corporate income tax rate and
adopt combined (unitary) reporting.
• Review the corporate franchise tax.
• Eliminate the estate and gift tax.
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Recommendations: Sales Tax
• Broaden sales tax base to include services.
• Lower the sales tax rate.
• Eliminate special rates and exemptions. For
example, change the highway use tax rate to
regular sales tax rate (funds dedicated to
transportation infrastructure, 1% = $200
million).
• Convert excise taxes to ad valorum, set at
the general state and local rate.
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Recommendations: Local
Revenues and Responsibilities
• Medicaid should be assumed entirely by
the state and paid for in a manner that is
fair for both the state and the counties.
• The State should provide greater flexibility
to local governments by allowing a menu of
revenue options including occupancy
taxes, Impact fees, Prepared Food, Vehicle
Tag, Land Transfer Tax (Deed Stamp),
Local sales tax option
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Recommendations: Local
Revenues and Responsibilities
• The State should allow counties to
reappraise real property more frequently,
use annual indexing and provide targeted
property tax relief.
• State and local governments must work
together to solve the looming
infrastructure needs of the state.
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Next Steps:
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Commission will reconvene in September
Staff to develop detailed proposal for fiscal
modernization
Solicit public input through hearings across the
state
Fine tune and draft legislative proposals by May
2008
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