Time for a chance: the state's tax system, mired in the past, no longer works. But bringing it into the 21st century will take a lot of guts.

• Author: Betts, Jack
• Position: FEATURE

There's a structual flaw in state government that virtually every study commission since the Fall of the Berlin Wall has come to the same general conclusion on how to fix, one that has the support of former governors from both parties, legislative leaders and the man many think most likely to be the next governor, as well as top Tar Heel business leaders. With all that behind it, you'd think it would be an easy fix. But this issue is radioactive: In the last decade, every good-faith effort to reform North Carolina's aging, dysfunctional, inadequate tax system has fallen apart for a host of reasons, few having to do with wanting to preserve a relic of the Great Depression that has been tinkered with ever since.

North Carolina's tax rates are too high. Sales tax is 4.75%. Corporate-income tax: 6.9%. Personal-income tax: 7.75% on the highest incomes. Yet the sales-tax base is too narrow, and the system is vulnerable to economic ups and downs and, based as it is on the state's 1930s textiles-tobacco-furniture economy, inadequate. Still another report, this one drafted in January. concludes: "North Carolina's tax system is based on an economy of a bygone era and will not generate sufficient revenue to Support the state h u d get even when the economy recovers." The solution sounds simple: Broaden the sales tax, now applied mostly to retail sales, to include services and cut tax rates. Eliminate the state corporate-income tax, perhaps replacing it with a restructured business-franchise tax, and enjoy relief from the constant demand for incentives that reduce corporate income-tax liability.

Here's why there is resistance to change and why reform keeps getting derailed: Any time you want to expand the tax base--such as by taxing more services--someone's going to complain that this is a tax hike or, worse, a new tax entirely. But leaders in both parties keep trying. Democrats, w ho controlled both chambers of the General Assembly with rare exceptions for more than a century, came close a time or two. Republicans, who captured the House and Senate two years ago, say their plan, similar in some respects to that of the Democrats, will gain traction in the session that convenes May 16 an.d could pass as early as 2013. "We're laying the groundwork this year," says Thom Tillis, speaker of the House (cover story, April). Bob Rucho, another Republican from Mecklenburg County who co-chairs the Senate Finance Committee, has been working for more than a year on a four-part state economic plan that includes initiatives in education, transportation, energy and taxation. "I don't want to put a Band-Aid on a bleeding artery," he says. "The current system is not functioning on all cylinders. It just requires a bold change. We want to be on the cutting edge."

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The bold system he, Tillis and GOP gubernatorial candidate Pat McCrory have been talking about goes further than what Democrats...