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Senate | June 11, 2013 | Committee Room | Finance

Full MP3 Audio File

Everyone please be seated and the Finance Committee will come to order. We have a real treat for everyone today; we’re going to have some guests, and anybody that… and the old rule is if you’re not from the General Assembly and you’re an expert, you really are an expert, and we’ve got four great ones today. Before we begin, I’d like to… Let’s see if we’ve got pages here today too. We’ve got our pages today are Jonathan Colby, and that’s Senator Sanderson; Amanda Davis, Senator Bryant; Ally Cleary, Senator Newton; William Cheung, Senator Allran; Spencer Zachary, Senator Allran; Tyler Hendricks, Senator Berger; Daniel Wrangle, Senator Berger; and Griffin Evans, Senator Goolsby. Thank you, pages. I hope your visit here is going to be worth every time you’re being here. I think it’s a great experience. We wouldn’t be able to run our committee meetings without our Sergeant-At-Arms, so Ernie Cheryl, Anderson Meadows, Donna Blake, Steve McCaig and Justin Owens, thank you very much for helping us with a nice, orderly meeting every time. Ya’ll are doing a great job for us. One comment before we get started. We’re going to present some questions which I’ll read, we will let them address, and then we’ll open it up for the committee for questions. We’re very lucky to have them here today. You’ve got a report in front of you regarding tax reform. Now I want everyone to understand that comprehensive tax reform is the most important issue that the General Assembly will face regarding the long-term viability of this state and its people. Because of the importance of this issue, I’ve reached out to university systems, specifically President Tom Ross, to assist the General Assembly in identifying the underlying economic problems and recommended solutions that’ll help create long-term jobs and long-term prosperity. I would like to thank President Ross and Leslie Boney, who helped to coordinate this effort and subsequently the report you have before you, and I’d also like to introduce the authors and the panelists that we have today: Dr. Mike Walden, to my right; Dr. Ben Russo, to my right; Brent Lane and Roby Sawyer. I should say Mike Walden from NC State, Roby Sawyer from NC State, Ben Russo from UNC Charlotte, and then Brent Lane from UNC Chapel Hill Canter for Competitive Economies. Today we have an opportunity to talk with some experts economic in how this state would be running in regards to a long-term economic prosperity. The questions that I’m going to ask and then I’m going to let each of them spend some time presenting will be one, regarding our present economic system and tax code. Does it meet the requirements of the 21st century competitive economy? Please identify those potential factors that may need to be addressed in formulating a solution to our economic problems, and then when should this action begin? Second question would be the facts that are before us that personal income paychecks are continually declining, especially over the past 20 years, and despite billions of dollars of government assistance, North Carolina’s poverty level continues to rise. We have the fifth highest unemployment rate in the country. Would you please discuss the best economic model and tax policy that would generate king-term economic growth and good jobs, and be specific as to the recommended options? And then the last question: Would a broad base sales tax on goods and services help or hinder economic growth and revenue volatility for our state? Those are some starting questions that I’ll ask the speakers to address, and then after a period of time when they’re tired of talking, we will open it up to questions to our committee, and I’ll say to them on the committee members, we have a very limited time. We need to be finished by 2:30. We would like and the Chair will say we’re going to ask questions only, no speeches, and in doing so, don’t be surprised if I say hey, the question’s getting lost. So that being said, Mike, would you like to begin? [SPEAKER CHANGES] Addressing questions one? [SPEAKER CHANGES] Addressing question one would be great, yes sir. [SPEAKER CHANGES] Well thank you Senator Rucho and members of the Senate Finance Committee and other important guests. I’ve seen a number of people I know here.

The question of tax policy is obviously a big one. The role that tax policy play sin economic growth which I think is one of Senator Rucho’s main concerns is unfortunately one that’s been debated, analyzed, by economists with no specific consensus that I can give you. I will say and my colleague can agree or disagree, I will say that I think there is a viewpoint among economists that if you have a tax system that interferes the least with economic decision making. Assuming that the decisions made by private actors in economy are ones that you want to have flourish. If you have a tax system that interferes the least with those decisions, that is to say where you don’t have a situation where a person is deciding whether to buy product A or product B for their business and they make that decision purely on the basis of which is going to perhaps save them taxes. As opposed to which is better for their economy and their business. That is a tax system that you’d rather have, that is to say one that does not tip the scales to one decision or the other. That has led many economist and many groups to talk about over the years, a tax system that has a broader base and lower rates. And I’ve been at North Carolina State University for 35 years and I know that issue has been discussed in this chamber and by administrations before. The issue though, one of the issues though and I think this has been widely battered about in the media and I know some of my colleagues have addressed this point on in their papers in the report. One of the issues of course is getting from here to there. Even if you do accept the notion that a broad base and a low rate is one that you want to aspire too, if you don’t have a system that has that right now, then making changes is obviously going to perhaps advantage some and disadvantage others. And I’m not willing to make those choices. I’m not paid to do that I’m paid to help you, provide information to you. So I think tax reform, tax changes are necessarily fraught with a lot of debate about how will this change affect my sector? How will this change affect my business? How will this change affect my bottom line? Even if you can agree on a broad principal. Let me say one more thing. We obviously have challenges, economic challenges in North Carolina and I spend a lot of my time at the University, as some of you know, studying specifically the North Carolina economy. That’s something I’m keenly interested in. When you look at an objective like increasing economic growth in the state which I think we can all say we would like to see. We would like to see our state grow faster, we would like to see our state generate more jobs, all at which at a faster rate. Unfortunately, again when you get into the weeds of the economic literature you find that a tremendously large number of factors affect a state’s economic growth. Taxes have been found in many studies to be one of those factors but I would say to you that they’re certainly not the only factor. Also there is a complex interplay between tax revenues and how you raise tax revenues and how you spend those revenues. And spending by states can help or hinder economic growth as can certain taxes. So from me unfortunately you’re probably not going to get a lot of clear cut answers because the literature is simply not very clear cut. [SPEAKER CHANGES] I will go on, and I should have premised this as we did on the conference call. Everybody at this podium or dias will also speak with one arm behind their back. So make sure that with a one armed economist we might get some good answers here. Doctor Russo. [SPEAKER CHANGES] Thank you very much, Senator Rucho for the opportunity to appear here to today to talk about tax reform. I agree with all of what Mike has said about economic growth. The issue about whether or not the.

The current tax system is up to a 21st Century economy can be answered in a number of different levels. It appears that at least one level it simply doesn't make the grade. Because of demographic and technological changes that are occurring in the economy. The demographics are an older population and spending more on medical services and the technology has to do with productivity shift between things that the economy produces. Goods, on one hand, tangible goods, versus services. There's been a very long-run transition in our economy from spending on tangible goods to spending on services. In 1947, were the data that I have observed begins, the average American household spent about 62% of its spending on tangible goods, the remainder on services. Today, those numbers are reversed. And the lion's share is on spending on services, which, of course, in our tax structure are untaxed. And there seems to be a structural change that's driving this shift from tangible goods to services, and with our current tax structure the sales tax base is just slowly eroding. As far as growth goes, Michael has said some very important things. And one of the things you notice when you study the literature on economic growth and the empirical analysis on economic growth is that there's no clear consensus. There are studies that show that a tax reform which would do the sorts of things that are proposed here and that Michael mentioned – broadening tax bases, lowering marginal tax rates. There's conflicting evidence on the result. Nevertheless, I think there is some agreement. I think there's quite a bit of agreement that lower tax rates tend to increase perhaps not the rate of growth, but the standard of living. Because they tend to encourage more saving and more investment. Now the interesting and important thing economists would tend to look at is this. If you have a tax change, a transition, the type that Michael talked about. Going to a system with broader bases, that is the things that are taxed are more comprehensive with fewer exemptions and at the same time you lower marginal tax rates. That encourages savings and it can encourage investment. But in the short run it could lead to lower growth. And I think that you see that in some of these studies. After all when people save more they consume less, everything else held constant. And that will tend to constrain growth. It could constrain growth in the short run. But in the long run it will lead to a higher standard of living. So, I tend to focus more on standards of living than economic growth because the results on economic growth tend to be more ambiguous, had to pin down. So I think there's a need for reform in the North Carolina tax code. I think it's actually essential. [SPEAKER CHANGES] Dr. Sawyer, would you share some time with us. [SPEAKER CHANGES] Glad to be here as well. I think what you've already heard is certainly consistent with my view as well. I think there's two keys here in reforming the tax system. One is as Mike referred to, is broadening the tax base and reducing rates. We do have high rates, both individual income tax and corporate income tax rates compared to other states in the Southeast, although we're about average if you look nationally. But reducing those rates, broadening the base is less distortive of behavior, less distortive of economic decisions, and most economists would agree that that's a good thing. I think the second key is reducing our reliance on the individual income tax. We rely on the individual income tax as a source of revenue to a greater extent than most states do.

much greater extent than we did 40 years ago. Just look back to 1970, about a third of the state revenue came from the individual income tax, a third from the sales tax, a third from other sources. You look today we provide more on the individual income tax; that's about 50% of our tax revenues comes from the individual sales tax. Sales tax hasn't been reduced all that much, maybe from a third to upper 20's or something like that but think about what happened with the sales tax rate during that time period. It went from 3% to 4.75% and our total revenue or sales tax revenue as a percent of total revenue went down even though we didn't reach those rates pretty dramatically over that time period. So I think both ?? comments and Mike's would be consistent with my view of broadening the base; reducing the rates is good; reducing our reliance on the income tax and as a result, increasing the reliance on sales tax is good from an economic perspective as well but going to Senator Rucho's question as to sort of the best economic model and tax policy, that is difficult to say with certainty. What I would say with certainty though is taxes matter but spending matters as well. If you hold spending constant, if you hold at least valuable services that are provided by the state to the taxpayers and citizens of the state constant, then yes, reducing taxes has a positive economic affect. You can also say to the contrary, if you hold taxes steady, increasing valuable services has a positive economic affect as well. I think it is important to keep in mind that taxes are important factors but they are only one. There are other factors that affect a company's decision to grow in the state or a company's decision to locate in the state in the first place. Infrastructure, K-12 education, higher education, the students that we turn out of our university system everyday and their training in community colleges and the university system as well so taxes matter but taxes are only one factor that is important to consider. [SPEAKER CHANGE] Thank you. Mr. Lane. [SPEAKER CHANGE] Emphasis on the Mr. much greater extent than we did 40 years ago. Just look back to 1970, about a third of the state revenue came from the individual income tax, a third from the sales tax, a third from other sources. You look today we provide more on the individual income tax; that's about 50% of our tax revenues comes from the individual sales tax. Sales tax hasn't been reduced all that much, maybe from a third to upper 20's or something like that but think about what happened with the sales tax rate during that time period. It went from 3% to 4.75% and our total revenue or sales tax revenue as a percent of total revenue went down even though we didn't reach those rates pretty dramatically over that time period. So I think both ?? comments and Mike's would be consistent with my view of broadening the base; reducing the rates is good; reducing our reliance on the income tax and as a result, increasing the reliance on sales tax is good from an economic perspective as well but going to Senator Rucho's question as to sort of the best economic model and tax policy, that is difficult to say with certainty. What I would say with certainty though is taxes matter but spending matters as well. If you hold spending constant, if you hold at least valuable services that are provided by the state to the taxpayers and citizens of the state constant, then yes, reducing taxes has a positive economic affect. You can also say to the contrary, if you hold taxes steady, increasing valuable services has a positive economic affect as well. I think it is important to keep in mind that taxes are important factors but they are only one. There are other factors that affect a company's decision to grow in the state or a company's decision to locate in the state in the first place. Infrastructure, K-12 education, higher education, the students that we turn out of our university system everyday and their training in community colleges and the university system as well so taxes matter but taxes are only one factor that is important to consider. [SPEAKER CHANGE] Thank you. Mr. Lane. [SPEAKER CHANGE] Emphasis on the Mr. [SPEAKER CHANGE] Sorry. [SPEAKER CHANGE] I'm not a doctor. Even the chairman is a doctor. I'm more of a conscript than the general's army here. I'm not an economist. I do study the economist but by no means am I a tax expert like my colleagues. I was pulled into the tax reform issue because of my concern about the ineffectiveness of our current tax code in regard to economic growth and particularly the way we have abused our tax code to try to achieve some economic ends that have proved to be a failed effort. Many of you have heard me speak on the subject of economic incentive, in fact a vast majority of what we spend on economic incentive, 90 plus percent, actually runs through our tax code and in our analysis at UNC of those tax code based incentives, 3,000 plus companies that we looked at; using our tax code, filling it full of exemptions and credits focused on certain beneficiaries has proven woefully ineffective. That's hardly surprising given that we have such a large economy, something that we need to all remember. We have the tenth largest economy in the U.S. here in North Carolina and we have the 28th largest economy in the world if we were a separate country and I understand there is a bill to that effect. What it boils down to is it is hard to move the needle on our economy but we have to. We should use the tools that work and riddling our tax code with exemptions that benefit a few firms but penalize hundreds of thousands has been a very unsuccessful economic strategy. In our conclusion and our analysis of economic incentives and use of tax code we recommended eliminating nearly all of the exemptions in the tax code in favor of lowering corporate tax rates because every business in one form or another is paying income tax on business revenues, regardless of structure and we need to look at economic policies that improve the business climate for all businesses of whatever form, wherever in North Carolina, and whatever industries they are active rather than

Trying to grab a few special treatments ?? a handful of firms. So in that sense is our tax code now appropriate for a 21st competitive economy? No, in fact it's been pretty darn bad in the 20th century. We made tremendous progress as a state in our economy up through the mid 90s but since then, even with the existing tax code with the progressivity that is built into it as it stands right now. We achieved neither economic growth in the last 15 years commensurate with our growth of our population and our workforce, nor did we achieve goals in terms of income and equity. So we have failed both in our economic policy through our tax code, and I believe, we have also failed in our civic responsibilities serving some of the citizens of our state. SO from my perspective as an intermediary between you and our experts here, maybe more of a hostage negotiator given the subject matter. No, this is a bad tax code. It's bad in terms of ??a generation, in terms of stability, and it needs to be changed so we don't try to make business easy for a few, we try to make it less hard for everybody, and regardless of what tax reform eventually takes, it needs to achieve a few essential characteristics that my colleagues I'm sure will speak to and in my mind one of them is to make tax policy as irrelevant to businesses, regardless of form, regardless of structure, regardless of industry, regardless of geography, we need to make it as irrelevant as possible so that people make good business decisions and collectively will grow our economy [SPEAKER CHANGES] Would anybody like to expand beyond that? Everybody's in agreement is that what I'm hearing? ok. Well, then I would guess we recognize the fact that we really don't have an option. We have to do something and I would assume from what you describe Dr Russo sooner than later. [SPEAKER CHANGES]Yeah, I think that time is growing short. I think the longer you wait the more difficult it is to make the changes that are necessary. That's my sense,. [SPEAKER CHANGES]That being said, and I think, have we addressed as many questions as we can in your presentation and would you like me to open it up to the floor? Ok, let's do it that way. I've got Senator ?? who first raised his hand with enthusiasm, Senator ??, question [SPEAKER CHANGES]Yes sir, thank you Mr Chairman, I think this is for Dr Russo. You were mentioning the savings rate when you did a tax change, a structure change, could be backing up a little bit. My question is, coming out of the recession over the last six or seven years, haven't we seen an increase in the savings rate and wouldn't this might be a good time to make that switch since we're already seeing increase in the savings rate. [SPEAKER CHANGES]Yeah, I'd like to just agree except we have to take into account the reasons the savings rate increased and that may have a lot to do with the sense of risk that was perceived after the financial meltdown. And so I might be able to offer some insight here. I'm not sure I'd be confident in predicting that heightened saving rate is going to continue. It should of course because the personal saving rate in the United States was in 1982 was about 10%, in 2005 for a few months it was negative. So we certainly would benefit in the long run from a higher saving rate. I just don't have a lot of confidence in suggesting that the recent increase would be sustained. [SPEAKER CHANGES]I agree with Ben's analysis. A large part of the reason why A people did not save prior to the recession, did not save in the form you and I would think of, taking some of the money out of their paycheck and putting it in a bank or a CD, is their homes were developing saving for them. We had of course the unprecedented housing boom putting equity at least on paper as part of people's saving. Then of course we had the housing crash and people entered the recession with record high debt, they were forced to save. So I'd agree with Ben, that we're probably going to be looking over the next as far as we can look at savings rates that are better than they were pre recession, but not as high as they were

[Speaker changes.] ....a re session... [Speaker changes.] Follow up question? [Speaker changes.] Yes, if...ok, let's transfer from the personal savings rate, and I don't know if this animal exists or not...the corporate savings rate...I understand there's probably more money sitting on the sidelines then we've seen, maybe in our lifetime...I don't know, Senator Rucho's much older than I am so maybe in his lifetime...but how could that be effected by changing the corporate tax rate? [Speaker changes.] The increase...and it is called by the Bureau of Economic Analysis corporate saving. The corporate saving rate may have increased for reasons similar to the ones that the personal saving rate increased...a sense of fewer investment opportunities before the crisis and a heightened sense of risk and banks became fairly stingy as well so I'm not sure. Mike, do you have... [Speaker changes.] No. I would agree with that. I think we're...yes, we saw...you were absolutely right...you are a follower of economic statistics...that corporate saving rate is very high. Again I think it's because of the reasons ?????? sited. Lousy economy. Where ya' gonna invest money? Don't wanna expand. We're losing money. So I would expect, as the economy has been slowly expanding and improving, that corporate saving rate will go down as corporations feel more confident to invest but I would expect a pattern similar to the one I said for the personal savings rate, that is will reach a sustainable point in the corporate savings rate that'll be lower than it was during the recession but somewhat higher then pre-recession. [Speaker changes.] ?????? I would like to mention one other thing. It's not just the corporate rate that effects investment in a particular state. Other aspects of the corporate income tax structure itself...for example, moving to single sales factor apportionment would tend to reduce the cost of productive inputs in property and payroll in a state so you might expect a move like single sales factor apportionment to reduce the cost of doing business in North Carolina, at least compared to doing business in a state where you have an equally weighted three factor formula or something like that. [Speaker changes.] Okay, Senator Rabin...Ron Rabin. [Speaker changes.] Thank you, I agree with some of the comments that have been made concerning the bazillion variables that are involved in...ya'know...what kind of a tax system is best and what's worse. That said, we still have to make a decision on direction and I think the question I would ask is...if I were the decision maker and I wanted input, it would be to answer what I consider one of the overriding questions and that one says "when we live in an economy where half of the people are working and paying and the other half are not working and taking, what's the best tax system that we can devise so that we can move forward and get a more vibrant economy under those conditions? Because if we continue down the path we are now, those conditions are not gonna' change and they tend to dominate, as far as I'm concerned, the decisions that we make. [Speaker changes.] Anyone? (inaudible...followed by laughter.) Doc Sawyer????, I'll reit... [Speaker changes.] Have you been recruited? [Speaker changes.] I'll reiterate what I said before in...to the extent that you're looking for a pro-economic growth kinda policy, I think that would be characterized by a tax system that's broad base and low rates. Now, how low the rates need to be is sort of the magic question that I don't have an answer for. If you wanna' be competitive with other southeastern states, somewhere between five and six percent would be my answer. How broad a base you need to get to a five or six percent rate, if you're lookin' at revenue neutrality, is the other question to be answered. [Speaker changes.] Doctor Sawyer??????, earlier on you discussed the issue of income versus consumption. Would you repeat that again...one more time. I think when you were discussing the issue of income versus consumption based on sales tax... [Speaker changes.] Sure, we certainly moved in North Carolina to a system that is reliant on individual income tax, much more than we used to and much more than other states so a move to a...what I would call a.....

...more balanced portfolio of tax revenue that relies more on the sales tax and less on the individual income tax, I think, would be a positive thing. And that can be accomplished by broadening the sales tax base to include services, for example. Of course, the difficult question to answer is how broadly do you increase that sales tax base? [SPEAKER CHANGES] When you mentioned five or six, Senator Apodaca was wondering, are you talking about corporate personal as far as rates are concerned early on? [SPEAKER CHANGES] I think both of those, a 5% to 6% individual rate, 5% to 6% corporate rate would certainly make us competitive with other southeastern States and make us competitive nationally, as well. [SPEAKER CHANGES] Rent? [SPEAKER CHANGES] ?? comments are consistent with the research we did on economic incentives. When we recommended reducing, in this case it was the corporate tax rate, it was to remove a competitive disadvantage. Again, if not helping a few companies was not hurting everybody. And what we saw was that if you eliminated an ineffective tax code based incentive, you could reduce the corporate tax rate to a competitive level. So it wasn't that lose nail on your deck you always trip on, we're just, we're higher than our competition and that was proving to be an unnecessary disadvantage, particularly when we could get rid of ineffective incentives and achieve a benefit that would have accrued many more firms. [SPEAKER CHANGES] Really? OK. Chairman Rabin, question? [SPEAKER CHANGES] Thank you, Mr. Chairman. We keep using two words that I like and that is economic growth. And I particularly liked the way Mr. Lane approached that problems and I will direct my question to him and then we'll let it slide up and down the bar. My question is this, when we're considering economic growth and increasing jobs, which has been what we said we wanted to do, and you've talked about reducing. I wanted to talk about eliminating. Eliminating personal income tax or corporate tax or franchise tax. Which of those or what combination of those would have the greatest effect on bringing about the best results? Put you on the spot. [SPEAKER CHANGES] The answer is we don't know because we'd have to take into account all the other actions that would be required to make those kinds of reductions. Obviously, reducing the cost of business in North Carolina will be an advantage economically, but it would have other effects in terms of the offsets you'd have to put into place. And they would have effects that could counter the benefits. The emphasis needs to be on, in my mind, simplicity and transparency regardless of the rate level. Businesses don't have to have a guaranteed zero rate but they would like to have a minimum cost of compliance and a reduction in the uncertainty so they can make decisions. But as I said make the tax consequences not relevant to those decisions. Obviously, reducing it to zero would influence a lot of business behavior. We have one class of firms in this State for whom we've reduced it to zero and I don't mean non-profits. We've reduced it to less than zero for the film industry. And the response has been a tremendous influx of film activity, but it hasn't produced much economic benefit. Let me step on hornets nest. But it does show that if you select an industry and target it for special treatment you will get a response for that sector but not necessarily the economic outcomes for the State of North Carolina that you desire. [SPEAKER CHANGES] Gentleman? Would you like a try at this one? [SPEAKER CHANGES] Just let me follow up just briefly on Brent's comments and these echo some of the things I said earlier. One of the issues, one of my task in this report that you all have, was to look at the studies that attempt to, actually answer Senator Rabin's question about what kind of tax structure would be best conducive to a faster growing economy. And if you look at those studies, which I do not recommend that you do, this is what you pay me to do, if you look at those studies you quickly, or a number of them, you quickly come to the conclusion there's not a lot of agreement. And one of the problems with all these studies, I'm not going to get in the weeds here, is that this is an incredibly, the economy's an incredibly complex system. Ben and I were talking before we started about the longer I do this, I'm now in my fourth decade of doing this, the longer I do this, this being talk about the economy, try to understand the economy, the...

More I realize I don't know as much as when I sorted out I know about the economy everyday. In all of these decisions are so intertwine so complicated and lot of depends upon the behavior response of business and individuals which can change overtime how people respond to a tax cut a tax increase so I simply leave you with the point that this is incredibly complex task and incredibly kind complex question to try to answer that is what is the effect of the tax code on economic growth. [SPEAKER CHANGES]Given the level of our ignorance on these issues its unfortunate we have to say but when you look at the literature and you read the ?? of papers that Michael has described where u have very strict people working hard to get answers but they get inconsistent answers. I think it put emphasis on the point that the type of tax system that Michael mentioned in his first comments one with a very broad base and a lower tax rate is probably be going to do the most good for the most folks. If you have a very broad base treat people generally the same u don't have people with equal incomes paying different tax liabilities lower rates and end fearless with individual consumer and producers decisions and that produces benefits because it reduces the inefficiency in the tax system . It makes for simple system that's more transparent,people can understand it, the administrators can understand it those are real benefits I think .[SPEAKER CHANGES]Thank you. As you through business certainties important also if you would help us understand that a plan looking into future when a business looks after for years how important is that when we should be structuring the plan. If you can fill that in this part of one of your questions Senator Brown [SPEAKER CHANGES]Chairman that is I want to tell you as a business I had about 120 employees and ?? and the last year to his I think it created so much in certainties for business liners that would not sure actually who to go in lot of cases. How have u perceived some ?? last year ?? You know a lot of businesses and a lot more and a lot of restaurants have to go have a poor time here because of uncertainties ??act them to have health insurance benefits and they have to pay and also I we should tax policy on the federal side and again also it has created a lot of uncertainties on the business community and who has a man. Can u touch all that's up as a state we should don't want a that's what we are trying to get away from some of this uncertainty.[SPEAKER CHANGES]You are absolutely right. I am a CPA as well as a professor. I have been had a tax practice for the last 30 years and worked in public accounting for few years as well and you are exactly right uncertainty is the ?? of small businesses existence, whether it would be regular for your tax issues or whatever so. Having a system that will provide a reliable sustainable source of revenue without needing to be tweaked and changed every few years. It is really key now of course we kind of necessarily effective works goes on national level. But I have already heard commentary to that instead the congress considers that tax reform is wanted to do tax reform lets leave it and learn for a little while. [SPEAKER CHANGES] I would just add that I agree how hardly ?? but on the point about uncertainty you are a business person you are looking making an investment may be in expansion of your dealership so you are looking perhaps five to ten years ?? so we get a positive return.You need to know you figure out whats the world look like five to ten years down ?? and of course no one know exactly the tax policy is apart of that other legislation and a part of that and to the extent that I am speaking a verbally and not picking ?? anything and to the extent you all can make that more certain that helps.

Just following up on Senator Brown. If we look at a long pathway as to where we want to go, would that be more beneficial to the businesses as they either decide to organically grow in the state or decide to come here. [SPEAKER CHANGES]Yea, people have adjusted to the tax system that we have, business folks and consumers as well and so if the system is going to be changed if it’s phased in that tends to reduce the costs of reducing adjustments. Changes in taxes and tax reform as you all know are always going to have winners and losers. [SPEAKER CHANGES]There’s a tendency that creeps into discussions of tax reform I’d like to disabuse you of right now. Tax reform is not a panacea just because it’s been hard to do and nobody’s been able to do it doesn’t mean we should exaggerate what our expectations are of its effect so once you do tax reform don’t do anything else for a while is the wrong message for you to hear. Once you do tax reform it proves you can do anything and you have many more things to do. Tax policy can improve the economic climate not only for businesses but for citizens but it won’t fix many of the challenges that we have in this state and they are economic challenges they are income challenges, they are income disparity challenges. Our fault has been expecting our tax code to do too much work that it can’t accomplish. So once you do tax reform you should be emboldened to know that you can take on the very necessary work that drives growth that drives wellbeing and education and workforce development and healthcare and an infrastructure. Those all remain to be done because the tax code will not fix many of the challenges we have in North Carolina. [SPEAKER CHANGES]OK I’ve got Senator Hise. [SPEAKER CHANGES]Thank you Mr. Chairman. One of the things I’d like to focus on for minute. Overall the purpose of the tax system is to generate revenue for the state. That’s why it’s here that’s coming forward. But we have a severe issue ion our current system we’ve with franchise gas corporate personal. The volatility that currently exists in our system from year to year and that is not tied directly to the economy. A three percent loss or growth in the economy might result in a seven, eight percent change in revenue that’s kind of coming forward. How do you structure the tax system to actually mirror what your cost needs are going to be going out and how do you do that best among the current systems we have and what are the worst for doing that? [SPEAKER CHANGES]Well certainly I think that the volatility we see right now is exacerbated by the high rates that we have. So you can see that if you look at income increasing by a certain amount during an economic upturn or decreasing by that same amount during a downturn you have higher rates the state swings in revenue are going to be more pronounced then if you have lower rates. So our high rates contribute to the volatility that we see. Our narrow bases do as well. If you look at consumption of primarily tangible goods that we have now that’s a more volatile pattern of consumption then if you look at consumption of services in addition to tangible goods and products. What you’ve heard thus far, reducing the rates and expanding the base, does reduce volatility. [SPEAKER CHANGES]There are perhaps some disadvantages some would point out to having a flatter income tax rate. One of the benefits of a flatter tax rate would be less volatility as well [SPEAKER CHANGES] Ok, good. Senator Tucker. [SPEAKER CHANGES] Thank you Mr. Chair Just a quick coupled of questions here thank you to the esteemed panel for being here today. I always like to hear Mr. Lang’s comments because he never minds stepping in a hornets nest and I kind of like that style too [SPEAKER CHANGES]

You fellas have spent most of your career in academia and as a business owner you stated earlier that tax policy should be irrelevant. And I moved my business from one county to another because of a lesser sales tax. And when you buy five or six million in commodities a year it makes a difference to your bottom line. So taxes as Mr. Lane eluded to does modify behavior. What I would like to know since you study numbers, and anybody can answer this. Number one Tennessee has a zero tax rate but there are people who will argue that Tennessee does not have as vibrant economy as North Carolina, number one that's the first question. And have you studied that and looked at it? And then I guess number two I hear all kinds of business rankings as a pro-business state status. Where is North Carolina based on the current tax code we have to do rank specifically to other states? If we don't do anything I've heard 42nd, 44th, those kinds of numbers. Can someone give me a concrete number? Then you hear number 5, and we're number 6. I need to know what you fellas, or you PhD's less one have studied and where do we rank as far as a business climate to other states based on our tax policy. [Speaker Change] I think Brent Lane has earned the right to answer this question. You want that question? [Speaker Change] I would dispense of the whole question of rankings. I know that's frustrating to you 'cuz you want a ranking, you can find one. And that's the reality. What it should point out this is something I've been trying to articulate. And is that is stop relying on tax policy to make your decision for you. Pick a tax policy that you think has the least detrimental effect to the most people, and see where the rankings fall out. What we need to be concerned about is not high rankings but well-being. We rank very high in a lot of measures. Site Selection magazine, one I love to pick on. Site Selection magazine is the bible of the economic development business. The last 12 years North Carolina has ranked number 1 in site selection, 11 out of 12 times. That just proves we're good at economic development but our economy is in steep decline. So we're focused on the wrong thing. It'd be like, I don't know sacrificing the integrity of a university in favor of a few banners. We've gotta stop worrying about ranking. Look at results. If you're in favor of progress 70, you should be focused on the results not policies. Results of our economic policies and our tax code has been poor in terms of economic performance, it's been poor in terms of income equality. So by either perspective you have on this, this tax code cannot stand. [Speaker Change] Senator Tucker the percentage of personal income in the state that goes to both state and local taxes. That ranking put, we're about in the middle there of the states, the 50 states. Your question about Tennessee's very interesting because I've just as part of my research, continuing research on how North Carolina's carrying our economy I've actually been looking at Tennessee. Tennessee's actually come out of the recession stronger than North Carolina. My preliminary rationale for that has to do with the ?? Importance of the auto industry in Tennessee more important there than here. Of course we have no assembly plants, we have parts plants. But the auto industry of course has enjoyed a major rebound partially due to federal help, and Tennessee has benefited from that. Anybody else wanna? [Speaker Change] Just one, I would agree with Brent that I would encourage you to ignore the rankings, but I would also say that I'm fairly confident that our current tax system does hurt us in those rankings. There are other factors that make up for what I think are problems with the tax system. [Speaker Change] Senator Jenkins. [Speaker Change] Thank you Mr. Chairman. Follow-up on a question that Chairman Raymond asked. Is you got three taxes out there that he inquired about? Your personal income tax, corporate income tax, and franchise tax. You all as a panel have all said 5 or 6 percent probably a good number to work within. My question truly is if you

Look at economic decisions they're made by human beings. And ultimately there's the personal income tax rate and maybe have more influence over economic development then the corporate income tax rate would have. [SPEAKER CHANGES] Senator Jenkins. Thank you. The gory details are in this report but actually the opposite, in the studies that I’ve looked at, and I've looked at scores of them would suggest the opposite. If you're looking at between the individual income tax, and the corporate income tax which was more consistently found to influence economic growth at the state level. The studies would point to the corporate income tax. [SPEAKER CHANGES] And certainly if you go back to Senator Rabin's earlier question about reducing these taxes to zero practically speaking, eliminating the corporate income tax is a much easier thing to do for this state, and any state then eliminating the individual income tax, or the sales tax. Simply because it's not all that important with respect to the amount of revenue that it raises. [SPEAKER CHANGES] Is the tax rate all that matters? or is it the tax compositions? [SPEAKER CHANGES] Yeah well the portfolio matters, and within the corporate income tax itself it's not just the rate it is other things like how do you apportion business income to a state. So you have a multi-state business. How is that income apportioned to North Carolina versus South Carolina and all the other states in which this company does business? I provide in the report an analysis of what moving from a system in which we currently look at property payroll and sales to a sales only factor might mean for the state as well. [SPEAKER CHANGES] OK, I've got Senator Cook. [SPEAKER CHANGES] I'm a little surprised to see so many economists agree with each other. However maybe my next question will change that a little bit. Assuming that you couldn't go down the road of water based sales tax and yet you wanted to have a tax policy, tax plan, or system that produces the most economic bang for the buck so to speak. What would suggest? [SPEAKER CHANGES] If you can't, if for some reason it was not possible Senator Cook. It's still a possibility of broadening the personal income tax base and by eliminating credits and some of the things that Brent Lane has talked about. And there by allowing lower rates and so I think that could be beneficial. [SPEAKER CHANGES] I think they're practical difficulties as you get to a very broad sales tax. Conceptually there's nothing wrong with broadening the sales tax to include a whole variety of services. Certainly I think there's good reason to expand the reach of our sales tax to more services. If you look at the states across the country we tax very, very few services compared to most states. How far you go is the question. And it's not an easy question to answer. I will say the further you go the more services you tax, the more practical problems you have with that including things like how do you exclude business to business purchases if you're looking a professional services, that kind of thing. [SPEAKER CHANGES] And I will go into Brent Lane's territory a little bit here, and maybe not step in a hornets nest, but maybe a bee's nest or something that's not gonna jump up at me too much. By saying of course you do need to worry or at least consider equity issues. When you I think it's well documented if you rely more on the sales tax, lower income households spend greater part of their income on purchases then higher income households. Is that going to widen effective tax rates between the two? And that's a well-known issue that's been discussed by various groups. One approach

You can handle that with a couple approaches. One would be to exempt certain kinds of spending toward medicine or whatever. Of course that gets away from broadening the base. The other would be to have some kind of a rebate system embedded in the system where households under certain income levels of certain sizes would get back in a lump sum, some of the sales tax that they paid in. [SPEAKER CHANGES] Follow up. [SPEAKER CHANGES] You’ve got a question, you’ve got an answer to that? [SPEAKER CHANGES] Well I would point out that I believe there’s a consensus among economists that suggests a consumption based approach in the long run is a sounder philosophy and strategy. But I’d also point out as an interpreter of economic work, that the most persuasive research I’ve read on that was from a Federal Reserve researcher who used long run to mean 150 years. We are looking at tax policy focused on consumption, moving in that direction. It will have economic benefit and it will have economic costs and side effects that will accrue in the near term perhaps before some of the long term advantages start to kick in. And those will need to be recognized and addressed through other means. [SPEAKER CHANGES] Is broader or narrower better, in that sense, as far as volatility and the like? [SPEAKER CHANGES] Certainly with respect to the sales tax, broadening to include services does reduce volatility. It may also, if you go to a very broad sales tax, help alleviate some of the regressivity concerns, I think. I think there’s some not complete agreement, but broadening the sales tax to include some service, I think arguably could be more regressive than broadening it very, very broadly. To broadening broadly. [LAUGH] [SPEAKER CHANGES] As well, I think that’s exactly right. Some work has been done by William Fox at the University of Tennessee and a colleague of his, that indicates that if the states, the fewer services that are taxed, the more regressive the sales tax tends to be. But if it were possible to extend the sales tax to all services, while at the same time avoiding the problem that Robie mentioned, taxing service business inputs, then the tax sense would be proportional, and it could be progressive if medical services were included. That’s awfully hard to do because of the ethic that we all share. On the other hand, you know, people benefit from those things and we benefit from the government services, why not contribute, make some contribution in that regard as well, medical services. In addition, the regressivity that might occur, given that the personal income tax were to live on, could be offset somewhat, mitigated somewhat, by having say a higher, I’ve got the word that was used by Senator Rucho for the zero bracket, having larger, zero bracket for folks at the lower income levels. That would tend to offset the regressivity that would occur as a result of broadening the sales tax. [SPEAKER CHANGES] Thank you. Any other follow up? [SPEAKER CHANGES] Quickly, I’m sorry. I was trying to ask you, if you couldn’t go down that road of broadening the sales tax, forget that, not going to happen, no way Jose, what would be the best way to stir the economy, to produce the best results? [SPEAKER CHANGES] Well I think you can still broaden the income tax, both the individual and the corporate income tax, and reduce the individual and corporate income tax rates. Absent making any changes in the sales tax for example. Now broadening the income tax would mean doing unpopular things like taxing Social Security to the extent that the federal government taxes Social Security. Conceptually I have no problems with that. At the corporate level, broadening the base means getting rid of the deductions and the credits and all the complexities that go along with that, and providing corporations, all corporations, those that benefitted from the tax breaks and those that didn’t, with a lower tax rate. So you can make meaningful reform or do meaningful reform without dealing with the sales tax. Having said all that, I go back to my original comment

Is we rely too much on the residual income tax and my recommendation would be to broaden the sales tax to some extent. [SPEAKER CHANGE] Another possible ?? would be to extend the franchise tax or perhaps replace it with a different sort of tax to LLC's, who I think are not now taxed. Although I'm not sure how much revenue that would be raised, someone might know . . . [SPEAKER CHANGE] About $750 Million. [SPEAKER CHANGE] Yeah. Yeah, so I think the franchise tax right now is applied to corps and not to LLC's and so there's one way of . . . [SPEAKER CHANGE] Yep. [SPEAKER CHANGE] In broadening, actually in broadening your franchise base, for instance. I've got about four or five more folks, Senator ??. [SPEAKER CHANGE] Thank you, Mr. Chair. I guess the question is supply side theory in that we're looking into using the tax code as a way of stimulating the economy. Can you guys share any thoughts or ideas in an area I would call catalytic tax changes, things that stimulate the economy or we could do things like if we would, maybe ?? offshore. International profits and bring them back in. Things where we would encourage, maybe do a tax waiver on a company that would repurchase their debt at a lower rate. Things like LLC, where we might do a waiver for some sort of working capital tarry for, rather than having to be taxed at a year end distribution. That will jump start the economy and be very probusiness. [SPEAKER CHANGE] At the federal level I think that there's a lot of things you could do. At the state level I think its hard on the margin to change the behavior based on the North Carolina tax code. Its one part of the puzzle, it has long term benefits that would accrue to the state, but as a catalytic and the immediate kinds of benefits, I think that's tough. Just think of your individual situation, the federal tax is a much more important part and impact on you than the state tax does and we have to live with that. One another side, you know, some of these things that you are talking about doing is certainly possible with federal tax reform that congress will do it for it. Congress may change the individual tax system, the corporate tax system, and things like that. That may make it easier in some cases for meaningful state tax reform as well. [SPEAKER CHANGE] If there were a successful way to accomplish what Senator Tarte is suggesting, one difficulty turns out to be tax competition of one state follows another and thats a good thing in a lot of way. But, as far as tax base goes, its not such a good thing. [SPEAKER CHANGE] Okay, I've got Senator Apodaca. [SPEAKER CHANGE] Mr. Chairman, its time to stop throwing the softball questions. There have been three ideas floated around this building. Senator Rucho, your's is the only one I would truly consider tax reform. There have been a couple others kind of ?? to the ends. Have you gentlemen had a chance to take a look at the proposal and give us your true opinion of said three proposals. [SPEAKER CHANGE] We were asked to look at Senator Rucho's proposal and when I first read it I felt very enthusiastic because of the basic approach as we have been talking about. Regarding basics and lowering tax rates, I am not that familiar, I don't feel confident with speaking to the others. [SPEAKER CHANGE] I would comment. I think I would encourage you to look at the similarities in the three bills, rather than the differences. All three, the House Bill and the two Senate Bills directionally do what a variety of tax reform committees have been suggesting for the last three or four decades. They all reduce the individual income tax rate, they all reduce the corporate tax rate, and they do base broadening. I would just encourage you to look at the similarities and not differences, and would suggest that a compromise would be a good thing for the state. [SPEAKER CHANGE] I've got Senator McKissick. [SPEAKER CHANGE] Well, actually Senator Apodaca cut through the case, because that was pretty much what I was looking for as well. An actual

Analysis of what your thoughts were about all three of the approaches that are out there or as I prefer is the ?? sale plan, the house plan, and the client filter plan. If there's, I think the thing that will be most insightful to this body is knowing what direction, which approach you feel is best to take. And if they're common elements that you think should be embraced as part of a comprehensive tax reform package, what exactly they are. So that we can kind of focus upon that common core, put the others to the side and try to come up with something that's a fair and reasonable trade off of competing equities. That's not regressive in the process in terms of it hurting disproportionally moderate and low income some individuals. So if somebody can help me get there quickly that would be appreciated. [Speaker Change] Well I'll try again in that. I would look at all three of those plans and suggest that a rate between 5 and 6 percent is fine. It's up to you to decide what that rate should be. But a rate between 5 and 6 percent for the corporate income tax, and the individual income tax, I don't think any of us would look at that and think that was a failure at the end of the day. A broadening of the sales tax I likewise would suggest is gonna be something positive for the state. It's a political question, the question you have to answer as to how broadly you're willing to go. There are positives and there are negatives with respect to that. One thing I would say is there's something missing from the House bill that I do think should be there. And what I talked about in the paper that you have before you and that is a consideration of a move to single sales factor apportionment for a corporate income. This scenario where states the trend is clearly states you’re moving to single sales factor apportionment, and it's a first mover advantage. We're not gonna be first we're gonna be about midway, because a lot of states have already moved to single sales factor apportionment. But if you expect any benefits from single sales factor apportionment you need to do it now, not later. Eventually that's where we're going, all states will have single sales factor apportionment. When you get there it won’t matter, but now it does. [Speaker Change] I worry that not extending the sales tax comprehensively, or more comprehensively to services risks not dealing with the sustained ability, or the lack of sustainability in the sales and use tax. The base is eroding, there's no reason to think that's going to change in the near future. In fact there's reason to think it will continue to occur with the shift more towards services in the future and if services aren't taxed widely, then the sales tax base will continue to be at risk [Speaker Change] Senator McKissick having economists talk about equity differences and making decisions on that is not what we do, but I do think that you make an excellent point and I think not only should we look at the what economists call the efficiency effects, but will these changes improve the economic prospects and ?? for the state, but we also wanna look at what will they do in the short run at least to people’s tax burdens of different income levels. I think that's certainly a factor to consider. And if that is something the body feels as if they need to deal with, how do you do it? As I mentioned earlier in a response to one of your colleagues questions do you do it through for example exempting certain kinds of activities or spending, or do you do it through a higher zero deduction. What is it? [Speaker Change] High zero bracket. [Speaker Change] We can't keep that in our head. A higher zero bracket, or rebates. I mean that clearly is a factor to throw into the mix. [Speaker Change] OK I've got. [Speaker Change] Quick follow-up if I could Mr. ?? It’s really quick. [Speaker Change] Real quick. [Speaker Change] Yeah I noticed Dr. Walden you state that you think that it's optimal to increase sales tax is about 40% per sale. Is that correct? [Speaker Change] No. [Speaker Change] Oh no. I've not taken a position on anything. No, no. [Speaker Change] Well that sounds like a politician doesn't it? [Speaker Change] No in the paper when I was modeling the effects of Senator Rucho's plan, or the Senate plan. I argued that the impact of a plan would be to increase the effective base by 40%. [Speaker Change] OK. [Speaker Change] Thank. [Speaker Change] OK alright. [Speaker Change] I was not implicating that. [Speaker Change] Each of these gentleman and many other folks have been very instrumental in providing a lot of great information to us.

As these plans are put together. I got two more folks, I got Senator Ron Rabin, and then Senator ?? Rabin and that'll do it I think. [Speaker Change] Thank you. The economy is like a ?? nut and I think we've been talking about taxes as if we had a silver bullet. Cuz I can't remember if it was Alexander who whacked the ?? nut with his sword or who the heck it was, I just know somebody finally got it done. [Speaker Change] ?? [Speaker Change] I know. [Speaker Change] ?? had to been. [Speaker Change] Actually you're right I was, and that proves it cuz I forgot. Anyhow it seems to me that we know why taxes are taken, are raised and that's to pay for things that we need. And unfortunately we have slipped into a habit of paying for things that we want. Wouldn't any really viable tax plan have to include controls on what we spend on at the same time otherwise we're in a never, the circle goes unbroken and I'll borrow another metaphor there. But isn't that sort of true? [Speaker Change] Anybody. [Speaker Change] Well I would say that both taxes and spending do matter. And cutting taxes and holding spending the same I think has been shown pretty consistently to be good for the economy at the same time increasing valued services with at the same time you keep taxes constant is good for the economy. So the spending parts important, what you spend on and what's valuable to businesses and the citizens of North Carolina's important. [Speaker Change] I've got one person then I'll give the peach panelists some time to close out and then we'll be finished. Chairman Rabin. [Speaker Change] Thank you Mr. Chairman. I'm going to circle back close to where I was before on the economic growth, and I would like for the panelists to spend maybe a moment or two, specifically on the franchise tax and the franchise tax in North Carolina. I don't think we've talked about that as much as we could. Many people think when we're talking about the corporate rate we're talking about that, that is included and I would like to have you address the franchise and you talked about the single sales of ??. But to address that and please comment as to whether there is a social impact by reduction of the franchise tax if any. [Speaker Change] Michael you haven't been able to locate any specific research on the franchise tax. [Speaker Change] No. [Speaker Change] The franchise tax is kind of a sister to the corporate income tax. In once case your taxing wealth, and the other case you're taxing the income that is generated from wealth. Wealth, one of the problems with the corporate income tax is that it's so volatile, it's probably the most volatile part of the tax system. Wealth tends to vary less than income does, and so by removing say more towards a franchise tax that could tend to reduce volatility somewhat. And lowering the rate would tend to have an effect similar I think, to lowering the corporate income tax rate, and that would tend to encourage investment in capital. [Speaker Change] OK. [Speaker Change] Well. [Speaker Change] We don't know how much of course. [Speaker Change] Thank you you need to do a first of all. Actually do you have anything else you might want to add? [Speaker Change] No I'm fine thanks. [Speaker Change] You get one chance. ?? [Speaker Change] I of course do have one more thing to say. What you heard from up here is more uncertainty then absolute clarity. But you deal with that reality in all the decisions you make. I will say there is one certainty that from my perspective as an observer of our state economy is that while the paths you may take in tax reform I think what's on the table are all in the direction of being more consumption based. It will be a path that will require careful monitoring and correction. There is one certainty though and that is that our current type structure is bad for all of us. You need this time to remove the status quo, the do nothing option from your list of what’s possible. [Speaker Change] OK I have to tell you it was tremendous

Have you hear today, having read that report twice and my eyes glazing over this is far better. So thank you very much and please join me in saying thank you today. with that being said the finance committee is adjured. What's the score? 4-4 is what we heard. And then the 16th and then another ???? Hey 4-4 is better than eight to nothing. Hey sir, yes sir. Thank you for all you do. ???