Blueprint for Tax Reform

North Carolina's legislators struggled to pass a balanced budget for the current fiscal year because the state remains trapped in a "trilemma." Because the state's revenue system no longer generates enough resources to fund basic services, legislators must struggle each year to addresses three seemingly incompatible goals -- crafting a balanced budget for the current year, addressing long-term structural reforms and encouraging economic growth.

This analysis comes from a recent report on North Carolina's revenue system conducted for the Z. Smith Reynolds Foundation by CFED, a national policy organization with a Southern office in Durham, N.C. While this report is focused on North Carolina, it contains valuable lessons for every Southern state grappling with chronic fiscal problems.

CFED argues that comprehensive tax reform based on the principles of stability, fairness and competitiveness is the only path out of the trilemma. To that end, the report details 12 recommendations that, if adopted, would promote the growth of "a fairly balanced, broad-based revenue base that can be used to provide high quality infrastructure, skilled workforce, and attractive communities." The result: better functioning government and a more economically competitive state. As the report's author observes:

"Stable and attractive conditions for business development and profitability depend to a significant extent on adequate but not excessive, efficiently administered, and equitable tax policies just as a sound business climate depends on the quality of public services.

"This is also why development-enhancing tax reform is inseparable from the 'reinvent government' agenda. We must always try to get more bang for the fiscal buck by investing scarce tax resources in the highest priority and highest yielding public investments and making government service delivery more efficient, effective, customer-friendly, and accountable. Efforts to create a high-quality revenue system and good government go hand-in-hand."