Thursday, January 10, 2013

A modest tax reform proposal for NC

Suppose that you had a perverse desire to maximize tax inefficiency--that is, maximize the administrative and compliance costs of taxes while minimizing the net revenues and net social benefit. What would you do? One strategy would be to enact a special tax charge and a special tax break the same activity.

This strategy sounds and is perverse, yet it is exactly what North Carolina does with appliance sales.

On the one hand, the state applies a White Goods Disposal Tax of $3 on each appliance sale to defray state and local waste management costs associated with appliances (e.g., special disposal of refrigerants). The Disposal Tax comes on top of the regular sales tax.

On the other hand, the state holds an Energy Star Sales Tax Holiday on the first weekend of each November in which sales taxes are waived for purchases of special energy-efficient appliances.

North Carolina also exempts the installation charges for those appliances (and installation charges generally, if the charge is separately stated on a receipt) from sales taxes.

For FY 2011, the Disposal Tax netted the state $3.9 million ($4.2 million in collections less $0.3 million for government administrative expenses. Figures from the state's Biennial Tax Expenditure Report indicate that the Energy Star tax holiday cost the state $1.7 million in sales tax revenue. The exemption on installation charges cost an additional $13.4 million, but the state does not break out how much of that came from appliance retailers.

An immediate, straightforward simplification to our tax code would be to scrap the Disposal Tax and to replace the lost revenue by eliminating the Energy Star tax holiday and tightening the exemption on installation charges so that it doesn't include appliance sales.

If closing these two tax exemptions doesn't provide enough offsetting revenue, the state could also eliminate its Political Parties Financing Fund Designation (one of the check-off boxes at the end of the personal income tax form), which diverted $1.3 million in tax revenues from the state to the Democratic and Republican parties.

At a minimum, the reform would knock one entire tax and one tax loophole out of the tax code, while narrowing another loophole and reducing retailers' administrative and compliance burdens.

How about it Raleigh?


Andrew Brod said...

Another tax quirk I've noticed in recent years involves the state sales tax. As you may know, nonprofits are able to avoid paying NC sales tax. But how it happens is truly inefficient. First, the vendor charges the nonprofit for sales tax and pays it to the state. Then the nonprofit files a form with the state to get that money back. How dumb is that?

State agencies are fully exempt from NC sales tax. They have exemption numbers and as a result the vendor doesn't charge sales tax in the first place. (The vendor does need to keep exemption letters and numbers on file in case it's audited by the state.) You'd think that something like this would work better for nonprofits, and everyone!, than the current situation.

Dave Ribar said...


Hi. Local governments may have to jump through the same hoops as non-profits.

You might be able to make a scale argument to justify the current system.

Also, the current system shifts the administrative burden from merchants to non-profits.

Finally, the current system may reduce fraud (it would be pretty easy to claim an exemption on behalf of a non-profit).

Andrew Brod said...

I believe local governments do have to do what private nonprofits do. "State agencies" includes UNCG but not the City of Greensboro.

And it's not quite right that the system shifts the administrative burden from merchants to nonprofits. Currently, the nonprofits have to pay the tax and keep track of it all in order to get it paid back. But the merchants have to keep track of it all as well in order to file their sales-tax returns. It'd be much less work for merchants to collect that one exemption form per customer and keep it on file than have to account for tax on each and every sale.

I don't buy the fraud argument either, because while the current system does indeed make it easy for someone to claim an exemption that might never be caught unless a merchant is audited (though all it takes is for one of a exemption-claiming buyer's vendors to be audited and the jig is up), there's no reason why nonprofits couldn't be issued exemption numbers just as state agencies are, and with about the same level of review as their rebate requests currently receive.