The ink of the Governor’s signature on North Carolina’s tax reform bill had barely dried when the howls began.
Now the tax bill did something important to help create jobs: By cutting tax rates it raised the state’s standing in the Tax Foundation’s Business Tax Climate from a bottom scraping 44th all the way up to 16th. But like any omelet (or tax reform bill) it broke a few eggs – in this case, the legislature ended 31 different tax credits for special interests.
Why the General Assembly closed the loopholes was straightforward: We made a calculated decision that North Carolina’s tax rates needed to be competitive with our neighboring states which meant we had to cut the top tax rates by 25%.
To do that the legislature curtailed spending and kept plans in place to close $460 million in loopholes. The economics was simple. We closed loopholes for some businesses so we could cut tax rates on all businesses.
But politics is not as simple as economics. A special interest with a tax break will accelerate its political activity when that tax break is threatened, going to work to turn up the political heat. So now we are hearing howls of protest and, as a result, some of the same leaders who supported tax reform are suddenly wavering.
Take the Historic Preservation Tax Credit, a special tax break for people or companies who renovate old buildings. The Governor signed the bill that eliminated the credit but now (with the best of intentions) he’s advocating restoring it which, of course, raises a tough question: If we are going to restore one loophole, why stop there? Why not restore the other 30 loopholes as well?
If we start down that road, before you know it, we will end up right back where we started – with millions in tax loopholes for special interests and high tax rates for all businesses.