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?