Wednesday June 24 | NC State Budget

June 22, 2009 at 1:50 pm | Posted in Coming Up | 15 Comments

Lawmakers in the NC House have passed an $18.6 Billion budget, but not before cuts were made in spending and services, that some members described as “brutal.” There remain critics, including lawmakers who think there is still unnecessary spending. Debate continues in the House and Senate with barely two weeks left in the fiscal year. We’ll explore what may be an unprecedented budget battle at our state Capitol.
Guests
Mark Johnson – Staff Reporter, Capitol Bureau of the Charlotte Observer
Dr. Gary Rassel – Assoc. Professor of Political Science, UNC Charlotte
Scott Pattison – Exec. Director, National Association of State Budget Officers
Dr. Michael Bitzer – Assoc. Professor, Political Science, Catawba College

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  1. This morning (June 24) a caller asked if business tax incentives are effective in the long run. A recent General Assembly commission report, very carefully done by a group at UNC Chapel Hill, found: 1) the tax incentives often go to firms that would have hired workers even without incentives, 2) surprisingly, on average companies that recevied incentives REDUCED hiring and investment (firms that are having trouble are most anxious to look for help), and 3) most CEOs surveyed say tax incentives are less important than other factors (skilled workforce, transportation, schools).

  2. The main problem here is our state constitution that does not allow for deficits in extrodinary times. I think we could all agree we are in extrodinary times. We should trim what we can, and run a deficit to cover schools and social programs as this is the time those will be tested.

    • We are in extraordinary times. Cutting programs during fiscal crises and raising tax rates does not lead to sound public policy. But deficits to finance operating budgets can also lead to unsound policy that is not sustainable in the long run (witness the long run budget shortfalls in Social Security, and the unsustainable federal debt policy).

      We take precuations against future financial disaster by buying insurance. State and local governments should do the same by increasing their Rainy Day Funds when times are good. If North Carolina had set aside 2% of expenditures per year since 2002, and earned 1% per year in safe assets, it would have had a sufficiently large RDF to take pay for the current shortfall (after the federal stimulus funds).

  3. Mark Johnson misstated treatment of the federal stimulus bailout. The governor counted the Federal bailout money in her budget proposal as spending and revenue. The Senate included about half of it. The House budget is the only one that counts all of the federal bailout funds as cuts.

  4. Popular opinion says that govt. must do the same as a household when times get rough – tighten their belt. But govt. is different – primary responsibility is to provide services. When times are tight more services may be required.
    In a household, we have savings to carry us through bad times. If govt. tries to set aside money during good times, the cry is “It’s our money; if you don’t need it, give it back (i.e. lower taxes)”.
    Balanced budget requirements reap what they sow.

  5. A caller suggested North Carolina should run deficits to make up for the current budget shortfall. An 1868 change in North Carolina’s Constitution (now rescinded) permitted county governments to run dedicits to finance current operations. A result was a rash of county level defaults. I believe a much better way to avoid the dislocations due to fiscal crisis is to take out insurance before they occur. North Carolina could accomplish this by increasing its Rainy Day Fund to a reasonable level (a suggestion made by the 2002 Governor’s Commission to Modernize State Finance).

    The structure of North Carolina’s tax system is seriously flawed: the sales tax base is shrinking and the corporate income tax is on a roller coaster, tanking during recessions. The result is periodic crises during recessions and long run insufficiency. The Senate Plan would move toward addressing these problems by extending sales tax to some services and lowering the sales tax rate, and extending franchise taxes to all fimrs and lowering the corporate income tax rate.

  6. Hello Mike…

    Your panel did not touch on one source of revenue that is being IGNORED by NC Dept of Revenue: Sales tax that is not being collected by firms that are out of state but have a NEXUS in North Carolina.

    One example: I am a Charlotte florist. By law, I must charge NC sales tax on every transaction. Out of state floral marketers do not charge NC sales tax, even though they are advertising in NC phone directories, online directories and pay-per-click ads with keywords such as “Charlotte Flowers,” “Charlotte Florist,” etc.

    In fact, at least 2 out of the the “big three” National Florists, (FTD, Teleflora and 1-800-FLOWERS) have paid staff in NC and are CHARGING NC sales tax on goods and services that they sell to their member florists, BUT DO NOT CHARGE SALES TAX on sales to the general NC consumer.

    In addition, at least HALF of the money that consumers pay to these out-of-state “florists” stays out of state. Local florists, and the jobs that they generate, are the losers.

    There are doubtless other industries that have similar transgressions.

    It is easy to show that there are millions of dollars in lost NC revenue taking place every year. NC D of R is aware of this issue but seems to be doing nothing.

    Bill Miller
    The Flower Hut
    Charlotte, NC

    One example;

    • Purchases from out-of-state retailers is reducing North Carolina
      sales tax revenue by increasing amounts. But North Carolina is precluded, by the U.S. Constitution’s Commerce Clause from taxing imports.
      Rulings by the U.S. Supreme Court make it unlawful to tax such purchases, unless the retailor has nexus in North Carolina. The Court defines nexus as “physical presence.” Therefore, advertising in North Carolina does not establish nexus, and does not get around the Commerce Clause.

      The North Carolina Dept. of Revenue has been attempting to deal with
      the problem by way of the “Streamlined Sales Tax Agreement,” which the Dept. helped spearhead in the early 2000s.

      • Now I am replying to my own reply. Nevertheless, folks who
        care about NC’s revenue system may have an interest in the
        following extension of my previous reply. I copied the following from the SSTP website (http://www.streamlinedsalestax.org/oprules.html)

        The Streamlined Sales Tax Project

        The effort that became the Streamlined Sales Tax Governing Board began in March 2000. The goal of this effort is to find solutions for the complexity in state sales tax systems that resulted in the U.S. Supreme Court holding (Bellas Hess v. Illionis and Quill Corp. v. North Dakota) that a state may not require a seller that does not have a physical presence in the state to collect tax on sales into the state. The Court ruled that the existing system was too complicated to impose on a business that did not have a physical presence in the state. The Court said Congress has the authority to allow states to require remote sellers to collect tax.
        The result of this work is the Streamlined Sales and Use Tax Agreement. The purpose of the Agreement is to simplify and modernize sales and use tax administration in order to substantially reduce the burden of tax compliance. The Agreement focuses on improving sales and use tax administration systems for all sellers and for all types of
        commerce…

      • This is why I enjoy Mike’s topics!

        Yes, current US Supreme Court rulings *seem* to preclude states from taxing. But in NY, the STATE has defined a nexus as including IN-STATE affiliate marketers. (I suspect that is headed to the high court also.) They are collecting Sales Tax from Amazon and others that are shipping products into NY State.

        A key point is that NC also has a nexus definition. It includes *A* requirement for physical presence, but also includes definitions regarding having resident personnel that are doing business in NC, as well as “exploitation” by means of phone and internet directories that are aimed at NC consumers. Put another way, you do not have a nexus if you advertise, “buy Coca Cola.” You DO have a nexus — per NC law — if you advertise representing your company as serving or supplying a NC destination.

        So… States Rights question: Who has the right to define the nexus within a state? The State or the US Supreme Court? BTW, the SC made its ruling — as near as I can tell — in the absence of any enabling US legislation.

        And please do not forget my earlier comment. At least two of the three largest floral suppliers have a self-defined nexus since they are — and have been for many years — collecting NC sales taxes from their NC members for certain goods and services that they supply. BUT they are NOT charging NC Sales Tax on orders that are destined for NC!

        I have billing statements to prove this with two of them.

        It must be nice to be able to decide which taxes you chose to pay, and which taxes you chose to ignore!

        NC D of R is aware of this, but does not seem interested.

        Bill Miller
        The Flower Hut
        BTW, is the plural of nexus nexi?

  7. More than one online dictionary says the plural of nexus is nexuses. Dunno: it sounds odd. However, in Greek nexus is Σύμπλεγμα.

    While at the University of Chicago, Austin Goolsbee published evidence that the nexus loophole in the sales tax provides a competitive advantage to out-of-state (remote) retailers. It is a boon to remote retailers, and a lousy situation for small NC retailers. In 1992, in the Quill vs. Illinois U.S. Supreme Court ruling, the Court gave Congress power to grant states the right to require remote retailers to collect the states’ sales taxes, if doing so does not put an undue burden on retailers. Congress has not acted. Perhaps they have been too busy being goofy to respond.

    I’m no lawyer, but in my humble opinion, I would think the Commerce Clause probably can be interpreted to grant the power to define nexus to the U.S. Supreme Court, not state legislatures. It seems to me that the Supreme Court’s ruling is less ambiguous than the qualifier *seem* (in “current US Supreme Court rulings *seem* to preclude states from taxing”) suggests. The Court stated that retailers who do not have physical presence in a state are not required to collect that state’s sales tax: period. As long as NY cannot overrule the Supreme Court, physical presence would seem to trump other criteria that states like (such as “business presence”). Perhaps a future U.S. Supreme Court ruling may change this. That possibility appears more likely now that SSTP has gotten many states to agree on definitions of taxable commodities, which simplifies tax collection. It helps, also, that there now is a robust software program that makes it easy for remote vendors to add other states’ sales taxes to commodities shipped out of state. The software is provided free to retailers, so it should no longer be a large burden to collect the taxes.

    I believe there is another way around the nexus controversy. Why doesn’t North Carolina pay remote retailers to collect NC’s sales taxes? This idea was a recommendation in the latest NC Tax Reform Commission. Published estimates indicate NC forgoes hundreds of millions of dollars in sales tax revenue to remote sales. Giving remote retailers a cut of the take could provide sufficient incentive for them to forgo their competitive advantage, and collect and remit the tax. NC retailers would be better off, remote retailers would be better off, and NC taxpayers would be better off (except those who now benefit by avoiding NC sales tax by shopping online or through catalogs). Why doesn’t our General Assembly act? Probably for the same reasons they ignore all the other Commission sensible recommendations. North Carolinians pay a large price for the inaction.

  8. Re nexuses, it sounds wierd. Makes you kinda want to keep on saying it: nexuseseses.

    Mr Russo said, “I believe there is another way around the nexus controversy. Why doesn’t North Carolina pay remote retailers to collect NC’s sales taxes? This idea was a recommendation in the latest NC Tax Reform Commission. Published estimates indicate NC forgoes hundreds of millions of dollars in sales tax revenue to remote sales. Giving remote retailers a cut of the take could provide sufficient incentive for them to forgo their competitive advantage, and collect and remit the tax. NC retailers would be better off, remote retailers would be better off, and NC taxpayers would be better off (except those who now benefit by avoiding NC sales tax by shopping online or through catalogs). Why doesn’t our General Assembly act? Probably for the same reasons they ignore all the other Commission sensible recommendations. North Carolinians pay a large price for the inaction.”

    On the surface of it, it seems to be a sensible suggestion. But, as Thomas Sowell suggests, let’s look at phase two, ie. what happens AFTER we do this.

    Why in the world would an out-of-state vendor be willing to do this? Online shoppers are not (too) stupid. When they KNOW that they can buy something TAX FREE, they will flock to that supplier — even if their final cost is actually higher. (I SAID, “too stupid,” didn’t I?)

    Remember when SC initiated Tax-free back-to-school shopping, and NC did not? It didn’t take too long to “level the field” when NC SAW thousands of NC license plates STREAMING across the state line to buy in SC. Now we have tax-free weekends also and ‘most any retailer will tell you that they look forward to that weekend wit anticipation of dramatic sales increases!

    So, what will happen if we adopt the “pay to play” idea is that most out of state retailers will ignore it. For those that do not, we will need an entirely new bureaucratic group to administer the (more) complex aspects of rebating Sales Taxes to folks in 49 other states. If NC tries to enforce it, off it goes to the US SC that will adjudicate it based on DIFFERENT PRECEDENTS than those that will be used in the New York case. Meanwhile, NO ADDED REVENUE will be generated!

    On the other hand, if NC goes after folks that are SELECTIVELY collecting sales tax on SOME NC sales, but not on others, then here is what I see happening in phase two: The “culprits” will be forced to pay sales tax while their competitors do not. That will mean that the former “culprits” will dramatically lose market share. And THAT means that they will want to re-level the playing field. And THAT means that they will start supporting taxing ALL NC transactions irrespective of source. Just like the local merchants that are losing business NOW!

    Sounds kinda like the classic “Baptist-Bootlegger” coalition that opposed the abolition of Prohibition!

    Bill Miller
    The Flower Hut

    • I agree with Bill Miller about “nexuses.”

      He must be right, also, saying that out-of-state (remote) vendors will not collect a state’s sales tax unless there is an economic incentive to do so. Paying remote vendors to collect sales taxes may not work. For it to work, the compensation the state pays a remote vendor must exceed the vendor’s administrative costs, plus the cost of lost business, minus the risk they will owe back taxes if they choose not to collect.

      Firms who choose not to collect sales taxes of SSTP signatory states may be billed for back taxes, if and when the law changes. States belonging to SSTP issue amnesty to firms agreeing to collect the taxes, against the possibility the states can collect taxes on remote sales made prior to a change in the law. This is only a risk: many firms may conclude they are better off taking the risk.

      Since the amnesty went into effect in 2005, a fair number of remote vendors have registered, so it appears that some large firms take the risk seriously. That may be why Amazon is collecting New York’s sales tax, at the same time that its position is that it does not owe tax on its remote sales in New York. And that may be part of the reason that remote E-commerce vendors with no North Carolina nexus pay 75% of the sales tax they would owe if the had nexus.

      Paying remote vendors to collect sales tax will tend to tilt some firms’ profit calculations toward registering in North Carolina and collecting its tax. Another incentive for some firms is that state law prevents North Carolina from economic relationships with firms who do not collect its sales tax.

      Nevertheless, Bill is right. Paying remote vendors to collect the sales tax may not be effective or it may not work at all. But there are only two things in life that are certain. People paying taxes that are otherwise avoidable ain’t one of them.

      Who’s Thomas Sowell?

      • Thanks for the interesting observations.

        Benjamin said, “Another incentive for some firms is that state law prevents North Carolina from economic relationships with firms who do not collect its sales tax.”

        I’d LOVE to learn more about this! On many occasions as a florist, I have received (heavily discounted) orders from out-of-state floral marketers with a signature like, “Condolances From Your Friends At DMV.” The order MAY have been paid for by the employees OR may have been paid by the state.

        Can Benjamin please point me to where this particular requirement might be found?

        And I agree completely with Benjamin’s comment, “But there are only two things in life that are certain. People paying taxes that are otherwise avoidable ain’t one of them.”

        Nobody (including Cabinet appointees) pays taxes unless they absolutely HAVE TO!

        Thomas Sowell is a Professor of Economics and is a Rose and Milton Friedman Senior Fellow at the The Hoover Institution, Stanford University. He is best known for his highly readable (as are all his works) “Basic Economics.” His website is: http://www.tsowell.com
        It contains copies of many of his Nationally Syndicated columns. He makes more sense than any economist I have ever read.

        Bill Miller

  9. I hope it is ok to respond to Bill Miller’s question with the following information: The Director of the Sales and Use Tax Division of North Carolina’s Dept. of Revenue states that North Carolina law provides that the Secretary of Administration shall not contract for goods and services with a vendor if the vendor … refuses to collect sales and use tax on retail sales delivered in North Carolina.


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