The Associated Press May 16, 2011, 8:38AM ET

GOP plan likely to seek simpler NC tax returns

North Carolina's individual income tax return can be daunting for average filers when they read lines seeking information about things such as bonus depreciation, long-term care insurance contracts or even the recycling of oyster shells.

All three can raise or lower tax bills or refunds. They're among dozens of lines in the six-page document known as the "D-400" return that can create headaches for tax amateurs and professionals alike. Many credits and income adjustments have been added by the Legislature since the last income tax simplification was passed in 1989.

"Our forms are complicated," said Roby Sawyers, an accounting professor at North Carolina State University, adding that every extra potential adjustment "makes the return incredibly complex. That shouldn't be."

Republican legislators agree. They're putting the finishing touches on an individual and corporate tax proposal that's expected to lower rates across the board and exempt the first $50,000 of small business income. Authors say the proposal will bring more certainty to companies about their tax bills.

But GOP leaders say they're also aiming to make returns simpler for the more than 4 million income tax filers annually.

House Speaker Thom Tillis, R-Mecklenburg, said those changes may include reducing the calculations needed to determine someone's taxable income. Some current individual income tax credits also may be eliminated, a key senator said.

"We can literally be cutting in half the amount of paperwork the average person has to file for their income tax returns," Tillis said. He said that could eliminate millions of pages of information that must go to the Department of Revenue. "That can be significant."

While package details are being worked out, tax policy experts and advocates warn simplifying the returns doesn't automatically create a fairer tax system. Simplicity can eliminate tax benefits for some groups that many believe are beneficial to society, they say.

"Fairness and simplicity are at direct odds with another," said Verenda Smith, interim executive director of the Federation of Tax Administrators, a Washington-based clearinghouse for state tax agencies. "If you increase one, you decrease the other."

The tax package undertaken by Republicans, if successful, may be a small step toward a generation-old effort to pass tax reform, a broad term used to describe reworking the tax code to reflect a state economy that's shifted from manufacturing to services.

The result has been the state receiving a decreasing percentage of its revenues from corporate income taxes and sales taxes because of exemptions, credits and a narrower base to tax. At least six committees or study groups have examined tax reform since 2000, but legislators and governors haven't succeeded in tackling the politically sensitive issue because it usually involves taxing new things even as overall tax rates are lowered.

Republicans who won last November's elections have said tax reform wouldn't be a front-burner issue in 2011 until the economy improved and state spending was cut.

Sen. Bob Rucho, R-Mecklenburg, considered the chief architect of the new Republican plan, said this year's package getting developed should be considered the first of two or three installments toward the goal of tax reform. This year's edition, he said, is about lowering tax burdens, which he argues could create up to 70,000 private-sector jobs.

"We're going to put money back into the hands of the working families and the small businesses," Rucho said.

Rucho said tax returns may be simplified by eliminating some credits that can be taken on the form, which would increase a filer's tax bill or decrease a refund. In exchange, he said, the standard deduction tax filers already can take may increase, which would reduce the amount of income subject to taxation.

"Some of the things that we have done in the past we're going to have unwind," Rucho said. "We're looking at the whole list of them and deciding which of them we can afford to give away."

Many income adjustments taxpayers are required to make won't go away because they're too popular or expensive to eliminate. For example, the state could have lost $360 million in revenue this year had they mirrored federal law changes to how business deductions and equipment expenses are counted.

"What cuts down on complicated paperwork is to what extent the federal government piggybacks on the federal income tax," said Mark Robyn, an economist for the nonpartisan Tax Foundation in Washington. "That's a very simple way of doing a tax calculation, but the state doesn't have as much control over the tax base."

Advocates for the poor in North Carolina say tax fairness outweighs simplicity in keeping a trio of tax credits they fear could be on the chopping block. They include credits for filers with children or for child care expenses, as well as the state's version of the federal Earned Income Tax Credit, which supporters say offsets sales and local taxes.

"Making sure that this system is equitable should be foremost in our minds," said Alexandra Sirota, director of the liberal-leaning North Carolina Budget and Tax Center.


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