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Experts Call for Tax Overhaul to Fund Roads, Schools

Wed February 15, 2006 - Southeast Edition
CEG



RALEIGH, NC (AP) North Carolina won’t have the money it needs to pay for road construction, public schools and health care in the future unless the state restructures its tax system, experts warned Feb. 6 at a forum hosted by former Gov. Jim Hunt.

“Financing the future is not a task for the faint of heart, or for those who worry about their political shadow,” Hunt said in his opening remarks at the annual Emerging Issues Forum at North Carolina State University.

North Carolina gets a little more than half of its $17 billion in annual tax revenues from individual income taxes, with a quarter coming from sales and use taxes, according to legislative researchers. Corporate income taxes generate approximately 6 percent of revenue.

However, those tax dollars have not kept pace with the state’s rapid growth in population and infrastructure needs, Hunt said. He asked those who came to the forum to help improve the state’s tax and finance system for the next generation of residents.

Several people at the forum suggested overhauling the state’s sales tax system to reflect the transformation of North Carolina’s economy from a manufacturing base to one rooted in service.

“Right now, the sales tax is imposed only on goods, and not services,” NC State Economist Michael Walden said during a panel discussion. “At the retail level, people are starting to spend more on services than on goods.”

Imposing a sales tax on services also would allow the state to lower the overall sales tax rate because the burden would be spread out over more transactions, said John Connaughton, an economist of the University of North Carolina at Charlotte. That’s a better option than only raising income tax rates, he said.

“The people who pay the highest income tax are also the most mobile,” Connaughton said. “They simply leave North Carolina.”

North Carolina lawmakers have struggled to find new sources of revenue in recent years, although the state does have a more than $200-million revenue surplus this fiscal year. Even so, the state’s expenses continue to climb.

Medicaid alone now takes up nearly one-seventh of the budget, while public school education requires approximately 40 percent of state spending. North Carolina also faces a $29-billion gap between the money available and the expected cost of transportation infrastructure needs in the next 25 years.

Although it’s unclear exactly how much money the state will need to meet all of its future costs, Walden and Connaughton agreed that the cost of health care will probably increase the most as the state’s population grows.

Looking ahead to determine how to handle that growth and other challenges will pay off, said Wachovia Corp. Chief Executive and Chairman Ken Thompson, whose Charlotte-based bank is the nation’s fourth-largest.

“We spend too much time talking about what we want to do in the next 25 days when we should be talking about the next 25 years,” he told several hundred people.

“We must stop trying to bring back jobs that are going away and focus on the future. Are we financing the right things? We need to fund educational programs to help people move from a manufacturing-based economy to services.”

While most speakers at the conference focused on the state’s tax code, former Treasury Secretary Paul O’Neill took issue with the federal tax system, calling it a “big mess” of more than 10,000 pages of regulations. He said $300 billion in federal taxes goes uncollected every year, leaving other taxpayers to make up the difference.

O’Neill said he would support the end of federal corporate income taxes.

“We have a huge number of people in companies who are working to reduce tax load the best they can, most of the time legally,” he said. “It also reduces the opportunity or need for corporations to post legions of lobbyists in Washington because there would be nothing for them to get there.”