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New pro-business tax study outlines four big proposals

A pro-business group is releasing a study Monday that outlines four options for overhauling taxes in North Carolina -- the latest proposal in the mix ahead of the legislative session.

The Tax Foundation study was commissioned by the Carolina Business Coalition -- a limited government, low-taxation interest group whose board includes former Republican Gov. Jim Martin. Its options put everything on the table -- but favor businesses more than other plans. (None include the business license tax Senate Republicans have suggested nor a repeal of all tax exemptions currently in law.)

Here are the options identified in the study, obtained by Dome. (Click link for full study.)

Option A: 6 percent income tax, 3.5 percent sales tax, repeal corporate and franchise taxes

Option B: 5 percent income tax, 5 percent sales tax, 5 percent corporate income tax and repeal the franchise tax

Option C: 8.75 percent sales tax, no income tax, repeal corporate and franchise taxes

Option D: no state sales tax, 10 percent income tax, repeal corporate and franchise taxes

Document(s):
North Carolina Study.pdf

N.C. business climate inches up

North Carolina's business tax climate improved slightly from 42nd to 39th in the nation, according to the Tax Foundation.

The group has steadily moved the state's ranking up over the past three years, but Republicans frequently point to the bottom-third placement as evidence that the state's taxes are too high. Democrats respond that when the overall tax burden is calculated -- local, state and federal taxes combined -- the state fares much better. They emphasize that North Carolina, unlike most other states, handles all of its education spending, which is more than half of the state budget, at the state level, so its taxes and spending will be out of line with states that handle education funding locally.

The top five climates (Nos. 1-5): Wyoming, South Dakota, Nevada, Alaska and Florida.

The worst five (Nos. 46 to 50): Rhode Island, Ohio, California, New York and New Jersey.

Claims Dept: the RGA's 2nd ad

The Republican Governors Association is running its second TV ad in North Carolina this election. Like the first, it criticizes Democrat Beverly Perdue and the "status quo" in Raleigh.

What the ad says: A narrator speaks while the ad shows a series of black-and-white images: a woman looking out a window, trees with no leaves, men with blank expressions, a Chinese flag. In the bottom right appears a red "status quo" button – a take-off on an ad campaign for office supplies.

Narrator: "North Carolina faces an economic crisis, and for 21 years Bev Perdue has simply pushed the status quo. Perdue presided over $6 billion in new taxes – voted to increase the gas and sales tax. Now North Carolinians have the largest-growing tax burden in the country – the nation's third-worst unemployment growth – 80,000 jobs lost to China. So what's status quo Bev's plan for the future?"

The ad ends with a quote from Perdue during a recent TV debate: "I would do exactly what's been done before."

The background: The ad raises two issues – taxes and jobs – and it argues Perdue will continue existing state policies.

TAXES: Perdue represented the New Bern area in the state legislature from 1987 until 2001. She has since served as lieutenant governor, a position where she presides over the N.C. Senate. She can vote only in the case of a tie, so her role in tax changes since 2001 has been only procedural.

The Republican Governors Association says the "$6 billion in new taxes" figure is the amount raised by new taxes imposed from 2001 through 2006. Almost half of that came from two temporary taxes that lawmakers and Gov. Mike Easley imposed because of a 2001 budget crisis: an extra half-cent sales tax and a new upper-income tax bracket. (In 2007, lawmakers eliminated the upper-income tax bracket and made permanent a quarter-cent increase in the sales tax.) The rest came from more than 60 other tax changes.

Easley and lawmakers have also cut taxes since 2001. In the 1990s, when Perdue was a legislator and a lead budget writer, lawmakers and Gov. Jim Hunt cut or eliminated some taxes.

The RGA cites at least three instances in which Perdue "voted to increase the gas and sales tax": a 1989 law that raised the gas tax about five cents a gallon to pay for road improvements; a 1991 law that raised the gas tax a half cent a gallon to pay for the cleanup of underground storage tanks; and a 1991 law that raised the statewide sales tax from 5 percent to 6 percent.

Perdue has also voted for tax cuts, including the elimination of the state sales tax on food in the 1990s.

The RGA says the claim about the "largest-growing tax burden in the country" is based on an April 12, 2007, article from The Tax Foundation in Washington, D.C. The article says "North Carolina's tax burden rank has seen the largest increase of any state since 2000," jumping from the 36th highest state-local tax burden in 2000 to the 19th highest.

The article, though, is based on outmoded methodology. According to the foundation's revised data, North Carolina's tax burden rank was 20th – not 36th – in 2000. It has since fluctuated between 17th and 22nd, and in 2008 it is again 20th.

A foundation spokesman has apologized for the confusion and an economist there says the newer methodology is more accurate.

JOBS: The phrase "the nation's third-worst unemployment growth" refers to a recent report that North Carolina's jobless rate rose from 5.9 percent in June to 6.6 percent in July. Only two other states, South Carolina and Mississippi, had larger gains during that one-month time period. Over a different time period – one year, for example – the ranking might be different.

The figure "80,000 jobs lost to China" has its origin in a July 30 report from the Economic Policy Institute in Washington, D.C. The left-leaning group says North Carolina lost 79,800 jobs to China between 2001 and 2007, more than all but seven other states.

In a 24-page report, the institute blames Chinese currency manipulation and the differences in Chinese and U.S. labor laws, among other reasons.

North Carolina Democrats, including Gov. Mike Easley, have repeatedly blamed federal trade policies for the job losses. Republicans have been more likely to blame state taxes, which they argue are too high.

THE QUOTE: The ad's final line, a Perdue quote, is from the Aug. 19 gubernatorial debate on WTVD in Durham. She was discussing how she would gather scientific advice on offshore oil drilling.

A fuller quote: "And I believe secondly that they must allow states to have the individual decision about what they're going to do in their state on drilling. I would do exactly what's been done before. I will listen to a team of engineers and scientists and ask them to tell me very quickly, to assess the new technology that's come since Governor Martin did the same thing in the late '80s."

Is it accurate? For the most part, no. Much of the ad either misstates or exaggerates Perdue's role, or takes her words out of context.

Perdue "presided" over tax increases in the sense that she held the gavel and helped record senators' votes, but her role was procedural. She did not propose the increases or vote on them.

Perdue did vote to increase the gas and sales taxes. She also voted to cut sales taxes.

The evidence that North Carolina's tax burden is the country's "largest-growing" is outmoded.

The ad's claims about jobs are accurate statements about North Carolina's economic health. There is no direct evidence to tie those losses to Perdue.

The quote about offshore oil drilling is taken out of context. To describe it as "Bev's plan for the future" is misleading.

– David Ingram

Claims Dept: RGA on the 'status quo'

The Republican Governors Association's first ad against Beverly Perdue accuses her of wanting to continue the "status quo" in Raleigh.

What the ad says:The ad shows two actors playing Raleigh insiders. They walk into the state Capitol to speak with an actress playing Perdue.

First insider: "We have to get Beverly Perdue to maintain that status quo."

Second insider: "How hard can that be?"

One of them holds a red "status quo" button — a take-off on an ad campaign for office supplies.

First insider: "Status quo Beverly Perdue!"

Second insider: "Bev, we have a new tax-increase plan!"

First insider: "Together, we've passed over $6 billion in new taxes."

Second insider: "The largest-growing tax burden in the country."

First insider: "Push the status quo button, Bev!"

The actress pushes the button and nods to other requests.

First insider: "Bev, time to raise the gas tax."

Second insider: "Just like we've done for almost 20 years."

First insider: "And no offshore drilling."

The actress pushes the button again.

First insider: "Bev, more pork-barrel spending."

Second insider: "Let's take it out of the slush fund you passed."

First insider: "Push the button, Bev!"

Narrator: "Tell Beverly Perdue North Carolina can't afford the status quo."

The background: The ad raises three issues — taxes, gasoline and government spending.

TAXES: The Republican Governors Association says the "$6 billion in new taxes" is the amount raised by new state taxes imposed from 2001-06. Almost half of that came from two temporary taxes that lawmakers and Gov. Mike Easley imposed because of a 2001 budget crisis: an extra half-penny sales tax and a new upper-income tax bracket. The rest came from more than 60 other tax changes.

Easley and lawmakers have also cut taxes since 2001. In the 1990s, when Perdue was a legislator and a lead budget writer, lawmakers and Gov. Jim Hunt cut or eliminated some taxes.

The RGA says the claim about the "largest-growing tax burden in the country" is based on an April 12, 2007, article from The Tax Foundation in Washington, D.C. The article says "North Carolina's tax burden rank has seen the largest increase of any state since 2000," jumping from the 36th highest state-local tax burden in 2000 to the 19th highest.

The article, though, is based on outmoded methodology. According to the foundation's revised data, North Carolina's tax burden rank was 20th — not 36th — in 2000. It has since fluctuated between 17th and 22nd. In 2008, it is again 20th.

Contacted Tuesday, a foundation spokesman apologized for the confusion and an economist there said the newer methodology is more accurate.

Perdue represented the New Bern area in the legislature from 1987 until 2001. She has since served as lieutenant governor, a position where she presides over the N.C. Senate. As lieutenant governor, Perdue can vote only in the case of a tie. So her role in tax changes since 2001 has been only procedural.

GASOLINE: North Carolina started taxing gasoline in 1921 at a penny a gallon. Lawmakers raised the tax over the decades, and in 1989 Democratic lawmakers and Republican Gov. Jim Martin pushed through an increase from about 16 cents a gallon to about 21 cents a gallon. Under the 1989 law, the tax fluctuates with the price of gas. It now stands at about 30 cents a gallon, the maximum under a 2006 law.

Perdue was a co-sponsor of the 1989 law. She has been largely silent in recent years while legislators debated a cap on the gas tax. She told The Charlotte Observer this year that she would support local-option taxes for transportation and consider other new revenue sources, such as a tax on miles driven.

On drilling off the North Carolina coast, Perdue says she wants to hear from scientists before taking a position. As recently as June, she had said she was "100 percent opposed" to the idea.

SPENDING: The terms "pork-barrel spending" and "slush fund" are generally associated with spending that meets any of several criteria: it does not follow a regular approval process, it is not transparent or it is not based on measurable criteria or need.

From 1995 through 2000, Perdue was a co-chair of the Senate Appropriations Committee. Though any spending must be approved by the full legislature and the governor, the position meant Perdue was involved in closed-door budget negotiations. There were at least two instances during this time when lawmakers, including Perdue, were accused of creating or using a "slush fund."

Before the 1996 fall election, legislative leaders and Hunt divided up $21 million from a "repairs and renovations" fund without specific approval from the full legislature. The money went to local projects around the state. The next year, lawmakers added another $39 million to the fund — a decision Perdue defended while promising more oversight.

"There will be a complete review," Perdue told the Greensboro News & Record. "There isn't a slush fund."

(The fund continues to this day. A legislative committee is charged with reviewing its spending.)

In March 1997, The Charlotte Observer reported on a $9 million annual transportation fund that lawmakers — not transportation experts were in charge of dividing up. Over a 26-month period, Perdue ranked second in allocations from the fund for local projects like road-paving. (The fund continues to this day.)

Is it accurate? The claims about taxes are inaccurate in two ways. Perdue has presided over the N.C. Senate since 2001, but she has rarely voted and has lacked the power to "pass" any tax changes. The support for the claim that North Carolina's tax burden is the country's "largest-growing" is outmoded.

The claim that there would be "no offshore drilling" under Perdue is a prediction that may or may not turn out to be accurate, as are the claims that Perdue would raise the gas tax and increase "pork-barrel spending."

— David Ingram

RGA uses old methodology on taxes

Two ads from the Republican Governors Association rely in part on outmoded information from The Tax Foundation.

The ads, which target Democrat Beverly Perdue, say that North Carolina has "the largest-growing tax burden in the country." The RGA told Dome that it based the claim on this April 12, 2007 article from The Tax Foundation.

According to the article, North Carolina's state-local tax burden jumped from 36th highest in 2000 to 19th highest in 2007 "the largest increase of any state."

But this chart (pdf) from The Tax Foundation says that since 2000 North Carolina's rank has fluctuated between 17th and 22nd. In 2008, it is 20th.

What gives?

The Tax Foundation told Dome Tuesday that it has changed its methodology since the 2007 article. The article used the old methodology, which the foundation considers less accurate than its new methodology, said Gerald Prante, an economist with the foundation.

Prante said the new methodology does a better job accounting for out-of-state taxpayers, among other things. "It's changed, just searching for what the truth is, trying to get the best estimate possible," he said.

Foundation spokesman Matt Moon apologized for the confusion. "That's very much our bad," he said.

The new methodology has been the subject of some criticism from another tax policy group that is more liberal.

The RGA has not said whether it will now change the ad.

Claims Dept: NRSC's 'Gold Medals'

The National Republican Senatorial Committee has a new ad attacking Democratic candidate Kay Hagan's record as a state senator.

What it says: The ad shows images of Kay Hagan with graphics similar to the Olympics. Narrator: "What if they gave gold medals for financial irresponsibility?" Announcer: "The gold medal goes to Kay Hagan." Narrator: "Budget writer Kay Hagan helped double state debt. The gold for government waste?" Sports announcer: "Kay Hagan." Narrator: "Hagan's budgets pushed North Carolina to the highest taxes in the Southeast. And the gold for twisting the truth?" Sports announcer: "Kay Hagan." Narrator: "The press said Hagan’s TV ad was 'overstated, inaccurate.'" Sports announcer: "Kay Hagan." Narrator: "The National Republican Senatorial Committee is responsible for the content of this ad." The ad says "Highest Taxes in Southeast 2006."

The background: The ad raises three issues: high taxes, state debt and a previous Hagan ad.

TAXES: Every year, the Tax Foundation, a Washington-based think tank, analyzes the combined state and local tax burden in all 50 states.

According to its overall ranking, North Carolina had the 17th highest burden in 2006.

The think tank does not break out the rankings by region, but the John Locke Foundation, a conservative think tank in Raleigh, has compared those numbers to other states in the region.

The Locke Foundation defines the Southeast as Florida, Georgia, North Carolina, South Carolina, Tennessee and Virginia.

The U.S. Bureau of Economic Analysis, the only federal agency to define the Southeast, includes those states as well as Alabama, Arkansas, Kentucky, Louisiana, Mississippi and West Virginia.

If those states were included, North Carolina would have been second highest in 2006, after Arkansas.

DEBT: The state constitution requires the legislature to balance the budget, so North Carolina's debt does not come from annual budget deficits.

Instead, the debt comes from bonds issued by the state to pave highways, build jails and college buildings and pay for other projects. The bonds are backed by the state's expected tax revenue.

From 2002 to 2007, Hagan was a co-chairwoman of the Senate Appropriations committee.

During those five years, the state's overall debt went from $3.5 billion to $6.9 billion — nearly doubling.

However, the increased debt has not hurt North Carolina's credit rating. The three agencies that rate government bonds — Moody's, Fitch and Standard & Poor's — each give it a top-tier ranking.

North Carolina is one of only seven states to have top rankings from all three.

HAGAN'S ADS: In an ad run in August, Hagan's campaign claimed that she "reach(ed) across party lines to ban driver's licenses for illegal immigrants."

A previous Claims Department by the N&O found that claim overstated the supporting role she played in that bill and the Senate Democrats' previous opposition to stronger proposals from Republicans.

The ad's "account of Hagan's role on the driver's license bill is overstated and inaccurate," the article noted.

Is it accurate? Yes and no. The claims about state debt and Hagan's previous ad are true. But the definition of the Southeast used by the John Locke Foundation is bizarre. Though the ad correctly cites the foundation's research, the claim is misleading.

— Ryan Teague Beckwith

How the Tax Foundation adds it up

The Tax Foundation measures tax burden by its own formula.

Although the U.S. Census Bureau and the Federation of Tax Administrators both compare taxation rates in states, the foundation's rankings are slightly different.

Unlike the Census Bureau, it measures the actual tax collections and not just the state rates. That allows it to account for the differing levels of local property and sales taxes:

For example, New York's state sales tax rate is 4 percent, and its counties have local sales tax rates that range from 3 percent to 5.75 percent. Connecticut, on the other had, has a 6 percent state-level sales tax with no local add-ons. In a ranking that includes only state-level taxes, New York appears less taxed than it actually is, and Connecticut appears more taxed.

The Tax Foundation also calculates how much in taxes were paid in other states, such as a candy bar you bought at a 7-Eleven across the border.

The total local and state tax burden is the total taxes collected divided by the total income.

Tax deduction reduces N.C. burden

Does the Tax Foundation overstate North Carolina's tax burden?

Critics of the nonprofits rankings of state and local tax burdens note that it leaves out the amount paid by North Carolinians in federal taxes.

That's important because the Internal Revenue Service allows you to deduct your state and local taxes from your income when filing. For states such as North Carolina that rely heavily on a state income tax that means a reduced federal tax burden.

That would affect North Carolina's overall tax burden compared to other states.

"Compared to the rest of the Southeast, North Carolina is probably one of the biggest beneficiaries of the state and local tax deduction," said Gerald Prante, an economist with the Tax Foundation. "But nationwide, it's probably not that high. Almost all of the states in the Northeast benefit more."

The Tax Foundation does not account for the deduction in its rankings because of the complexity of the calculations and a lack of good data, Prante said.

The amount the deduction benefits individual taxpayers depends on how much they earn. Taxpayers who earn less and don't itemize their expenses don't benefit, but those in the middle and upper class who itemize do, as long as they aren't affected by the alternative minimum tax.

State tax burdens in the Southeast

North Carolina has a higher tax burden than most Southeastern states.

But it has not been ranked the highest among the dozen states considered to be part of the Southeast by the Tax Foundation, a Washington-based nonprofit.

Using as its guide the states considered Southeastern by the U.S. Bureau of Economic Analysis, the foundation has ranked North Carolina between the fourth and second Southeast states in terms of tax burden since 1977.

A recent ad targeting Democratic Senate candidate Kay Hagan cited research by the Tax Foundation, among others, to back its claim that budgets she helped write "pushed North Carolina to the highest taxes in the Southeast."

In 2002, the year before Hagan became a co-chair of the Senate appropriations committee, the Tax Foundation ranked North Carolina the third highest state in the Southeast, below Kentucky and Arkansas.

Over the following five years, North Carolina remained in the top three, but it was never in the top spot.

In 2008, it dropped to fourth, below Arkansas, Georgia and Virginia.

Still, it was close. The differences between the rankings were often based on a tenth of a percent and the states were only a few slots apart in the overall rankings.



Document(s):
SE-Tax-Burdens.xls
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