Outgoing Income Tax?

February 6, 2013

Uhaul truck

I love how North Carolina Republicans are stirring the pot. Watched or not, this one is boiling. It seems the liberals may not like what their co-legislators are cooking, however. First, NC Governor Pat McCrory turned up the heat with his questioning the role of some state subsidized college curriculums in not properly paving the way for employment.  Now Republican State Senator Bob Rucho, is fanning the flame for radical tax reform here in NC. With our state struggling with a 9.3 % unemployment rate, 5th worst in the nation, Sen. Rucho feels the time is ripe for new ideas. NC is not alone in edging towards repealing the income state tax in favor of a “consumption” or sales tax on an increased array of goods and services. Louisiana, Nebraska, and Kansas have all proposed similar ideas. Other states, like South Carolina are entertaining income tax cuts. Seven states currently have no state income tax, and two others have exempted certain types of income.


Rucho has a host of supportive reasons for his radical plan. Our state is hurting, and he believes that repealing the state income tax would attract new businesses. Income taxes are volatile, sharply declining as income declines. Indeed, in NC, with per capita income falling since the late 1990s, it is past time to explore other options to stimulating economic growth, new business, and employment. Some studies show that the seven states with no income tax have a 25 % higher growth rate over the past ten years than the national average.  The poverty level in NC has risen, such that it ranks 12th in the nation now. Rucho contends that his plan would help the poor by stimulating economic growth and attracting new businesses and jobs. Nothing helps unemployment more effectively than employment opportunities! Details of Rucho’s plan can be found here.


In 2012,  1.7 million workers nationwide, age 18-29 were unemployed for more than a year. (fairtax.org)  Promoting elimination of a Federal income tax,  analysts at fairtax.org  suggest that the current tax code discourages hard work, punishes small business, and penalizes investment. President John Kennedy said “the largest single barrier to full employment of our manpower….the federal income tax.” The corporate income tax drives companies overseas. The federal income tax is complex, confusing, filled with loopholes, and subject to corruption. The arguments at the federal level can certainly be applied to the state level as well.


Critics of replacing  the state income tax with a sales tax insist that the latter disproportionately hurts the poor.  A greater percentage of their income would go towards necessities that every person must purchase to exist. This “regressivity factor” is a valid concern, but is acknowledged and corrected by the provision of  “pre-bates”-  money paid monthly to low income groups to offset the taxes on essential taxable commodities like food. It is interesting that in the two page Charlotte Observer article on Sunday, Feb. 3 explaining Rucho’s plan, there were several paragraphs devoted to the regressive nature of consumption taxes and the plight of the poor, but no mention of Rucho’s solution to that aspect of the plan.


So why not stick with income and corporate taxes and find other ways to attract businesses? As an example…look how well it has worked for California. California has the highest income tax rate, and one of the five highest corporate tax rates in the nation.


Are businesses flocking to that beautiful state with its oceanside view to the west and towering magnificent redwoods to the north? Well, “quelle surprise”, no. In fact, California is ranked with the third highest unemployment rate in the nation. The business climate there is ranked the 48th worst in the nation.  NC, ranked 44th by the same group,  might want to look a little higher up the list for effective business models.


One of the more interesting statistics to note in measuring economic growth of states is to look at the “U-Haul index.” High priced one way tickets into a state indicate the demand to move there is high. High priced one way tickets out suggest the gold rush might be over. As noted by New American writer Bob Adelman,  “Renting a 20-foot truck one way from San Francisco to San Antonio, Texas, for example, costs $1,693. Going in the other direction, however, costs only $983 for the same truck.”   California, here we go!


There is a moral consistency with taxing consumption, as opposed to income. Hard work is not penalized, but every purchase consumers make will perhaps be more carefully considered. Distinct advantages emerge from saving and investing. Successful businesses are not punished, and might be more inclined to move to states that reward profitability.  The need for a bureaucratic State Revenue department would be greatly reduced, with the resulting savings in state expenditures. The tax code would be simple, understandable, and difficult to avoid.


For the first time in 20 years, a Republican inhabits the NC Governor’s Office, the third in North Carolina history. For the first time ever, a Republican governor will lead a Republican-led NC General Assembly. This is the time to make bold and needed changes. The pot is boiling, and I think the ingredients could coalesce into something really delicious. If not, U-Haul might be doing some brisk business out of NC.


By: Vicky Kaseorg

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