Lawmakers to consider sales tax for services

RALEIGH, N.C. - State lawmakers face a $1 billion budget gap when they return to session in January and may consider charging sales tax for some services to raise extra cash.

Lawmakers and officials in Gov. Mike Easley's office have discussed the idea before without making a serious push for it. But the budget deficit, a shrinking sales tax base and the expiration of three temporary tax increases in June may add pressure for a change.

Some legislators don't like the idea.

"If we start taxing services, get ready for the next election cycle," said Sen. David Hoyle, D-Gaston, chairman of the Senate Finance Committee. "There'll be some people in the [political] obituary column."

The established budget includes spending that is about $1 billion above expected revenue, because of the soon-to-expire tax increases and because millions in this year's budget came from one-time sources. The budget doesn't include increases in Medicaid costs, pay raises for teachers and other state employees, and the cost of additional students in schools and universities, which together could cost the state $500 million.

A frequent point of discussion is reducing the sales tax rate and then expanding it beyond tangible products to some services.

The portion of consumer spending that goes to products subject to the sales tax has been steadily shrinking for years. Consumers are spending more on health care, lawyers, cable TV, accountants, repairs and other services.

North Carolina's tax system was designed for a manufacturing and agricultural economy in the days when textiles and tobacco were king and there was no Internet shopping.

"Expansion [of the sales tax] into services is one part of an examination of the total tax system to align it with the 21st-century economy," said Sabra Faires, chief of staff to state House Republican Co-Speaker Richard Morgan and a longtime expert on the state tax structure. "Tax bases can be expanded and the overall rate lowered."

Faires and others examining the sales tax are not talking about taxing medical and legal fees, but may, for example, suggest adding repair, maintenance and installation of personal property, such as car repairs.

Tickets for movies, concerts and other entertainment already are subject to a gross receipts tax that could be converted to a general sales tax, Faires said.

"Any tax on services would be met with overwhelming opposition," said Rep. Mitch Gillespie, R-McDowell.

Senate Republican Leader Phil Berger of Rockingham County said no one has made a convincing case for taxing services. He and other Republicans want to see state spending cuts instead. "We continue to grow government at rates that are not sustainable," he said. "That's the part of the equation that we don't seem to look at."

Broadening the sales tax would be difficult, said House Co-Speaker Jim Black, D-Mecklenburg, who also wants to look for spending cuts first.

Easley's office declined to discuss the idea, saying it is too early in the legislative process.