Hopes for overhauling the federal tax system are fading in Washington, but in some state capitals, tax reform experiments – some far-reaching – are fast taking shape. While tax reform efforts have been tried many times during the last 20 years in the U.S. special interest groups, and partisan politics have prevented any real reforms to the currently convoluted tax system. After the last elections in 2012, tax reform groups have turned their efforts into the “more manageable” state tax boards, and with many states legislations fully in control of a single party, they are experimenting with different tax schemes to address the unpopular current tax code.
How could these changes affect your business?
Some of the proposed changes may substantially affect your business if they are implemented. As an example in a state like North Carolina, the potential tax changes could require the current sales tax to be increased from the current 4.75% to 6.53% to cover the needs, in other words almost a 37.5% increase to the state sales tax. That is a substantial change to the tax base that as an example could impact tourism revenue if the hotels and restaurants require visitors to pay such a substantial cost increase. It could also impact local sales since people closer to the border with their neighboring states may decide to make their purchases across the state border lines in order to avoid the increased taxes.
While individual states tax reforms may potentially be successful in the short-term, they remind me of the old Robin Hood story (steal from the wealthy, and distribute it to the poor). With a struggling economy, increased risk of capital flight risk from large companies and wealthy individuals, and a diminishing middle class, any changes to the tax code may suffer from the “Law of Unintended Consequences”. Yes, I fully agree that the current U.S. tax code is out of hand, and does not meets the needs of a country in the middle of a recession, and facing increased international competition due to the impact of globalization; but making sudden changes without understanding the consequences could put those states economies and their citizens at risk unnecessarily. All I can say is “be careful what you wish for… you may even get it”
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