Another way to win tax reform.

• Author: Hood, John
• Position: FREE&CLEAR

North Carolina politicos have known for nearly a year that a major battle over tax reform is coming in 2013. They figured that because of voting trends, redistricting and other advantages, Republicans would maintain control of the state legislature. And they figured Republican Pat McCrory would win the race for governor, adding a chief executive who endorses fundamental tax reform to a set of legislative leaders who feel the same way.

As a result, lawmakers and public officials have spent the past few months preparing for the tax-reform battle. So have trade associations, interest groups and lobbyists. Most have focused on expanding North Carolina's retail-sales tax to include most or all services, using the proceeds to reduce or eliminate the state's personal-and corporate-income taxes.

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Here's the rub: The more I study the lay of the land and talk to interested parties, the more I suspect we aren't about to witness a tax-reform battle at all. It will be a battle re-enactment. That is, it will be a colorful event. Participants will play their roles well. But the ending is written into the script. The forces of tax reform will raise their banners, give a full-throated yell, charge into the line of the status quo and get slaughtered. Observers will shake their heads in resignation at the power of vested interests and credit the wounded reformers for trying. They'll note that efforts at tax reform always seem to fall short. Then everyone will move on to the next political drama.

But North Carolina can't afford to. Our uncompetitive tax structure really is a factor inhibiting our success in the 21st-century economy. Our marginal tax rates on work, savings and investment are high by national and international standards. Our corporate tax is needlessly complex and riddled with inefficiencies. We also have one of the country's worst-designed sales taxes, particularly as it affects business-to-business transactions. We need pro-growth tax reform. Here's a different way to do it.

Those who advocate an expanded sales tax are correct in principle. Consumption is the right tax base to target.

If you think about it, income is the total of three things: the money you spend today (consumption), the money you save to spend later (investment) and the money you give away to support someone else's consumption (charity). If government taxes all income at the same rate, it actually creates a bias in favor of you consuming your income...