Ask nearly anyone who worked on or followed the 2013 historic tax changes in North Carolina, and they will agree that Phil Berger, the Republican president pro tem of the state Senate, helped lead those efforts.
Opinions sharply diverge, however, on whether that's a compliment.
Berger was instrumental in the change, said Sen. Josh Stein (D), a staunch opponent of HB 998, the tax package that switched the state from a progressive income tax to a flat one, lowered corporate taxes, and repealed the estate tax. The package represented the first major change to the state's tax code in 80 years.
Stein said that under Berger's leadership, the Senate pushed for the tax package even though it would lead to a shortfall of up to $600 million a year by fiscal 2016. He said that was contrary to what was originally proposed by Gov. Pat McCrory (R), who said in his State of the State address that tax reform should be revenue neutral.
"The Senate wanted to use the guise of tax reform as an opportunity to give tax breaks to their special interest backers," Stein said.
Brian Balfour of the Civitas Institute, a strong supporter of HB 998, said he sees it another way. He pointed out the significant differences in the tax plans that emerged from the North Carolina House and Senate in the early summer of 2013 and said Berger was a significant force in saving tax reform. "He really poured a lot of energy into his plan and the changes he was trying to make to the tax code," Balfour said. "Certainly he's got his eye on the next goal -- elimination of the individual income tax."
The Long Road to a Tax Overhaul
Berger, 61, said HB 998 represented the fruition of goals he and some colleagues shared for many years. He began speaking about overhauling the tax code when he first ran for the Senate in 2000, but it wasn't until November 2010, when Republicans won elections that would give them both chambers of the legislature, that Berger thought the chance might finally have arrived. He said that chance solidified when McCrory was elected governor two years later.
At the time, North Carolina had the highest corporate and individual income tax rates in the Southeast. "We had an opportunity to do something that created a tax system in North Carolina that was a huge improvement over what we were dealing with," Berger said. "We had a tax system that was almost totally dependent on income taxes. We wanted something different."
That was an ideal shared by all Republicans, but when it came down to how to overhaul the tax system, there was plenty of variance, Berger said. The North Carolina House advanced a plan with individual and corporate income tax rates that were higher than those eventually adopted. The House plan also would have expanded the sales tax base to include more services.
The next blip in the process was a well-publicized rift between Berger and Sen. Bob Rucho (R), co-chair of the Senate Finance Committee, over a plan Rucho advanced to achieve what most tax policy experts would consider true reform. Simply put, Rucho's plan would have sharply lowered all rates and eliminated most deductions, exemptions, and incentives.
Just as important, Rucho's plan would have applied the sales tax to nearly everything, including many services that had never been taxed, and in what was considered the heaviest political lift, expanding the tax to groceries and medicine. Rucho's plan was so bold that it prompted Martin A. Sullivan, Tax Analysts' chief economist, to praise Rucho as a "tax reform hero" (http://www.taxanalysts.com/taxcom/taxblog.nsf/Permalink/MSUN-9BDFSZ?OpenDocument).
Berger, who has his own law practice in Eden, North Carolina, said that in principle, he agrees with Rucho. "Bob had a lot invested in tax reform, and in a particular concept of tax reform -- that is, that we would move North Carolina from a state that had a personal income tax and a corporate income tax to a state where we were on a path to a consumption-based tax system," Berger said. "We had the votes in the Senate, but we were not going to be able to move forward with that as our end product in the session in 2013."
Berger said the House and McCrory were simply not going to sign on to a plan that expanded the sales tax to that degree -- there was too high a risk of strong political backlash. He said he promoted the idea of a consumption-based system, but the reality was that it wasn't going to happen. "The question then became, what were we going to do?" he said.
In the end, Berger answered the question himself, putting Rucho's plan aside and coming up with his own. It called for a lower, flat income tax, repeal of the corporate tax, and elimination of deductions. It also included a significant change to the taxation of utilities: Natural gas and electricity would be subject to the sales tax, which averages 7 percent when both the 4.75 percent state rate and local add-ons are factored in, rather than the 3 percent excise tax.
But Berger's plan didn't expand the sales tax base much beyond the utilities. That nearly became the deal-breaker for Rucho, who said Berger's plan was not comprehensive because it did not rewrite the sales tax code. He voted against it in the Senate and resigned as committee chair. Eventually he returned, but only after sitting with the rank-and-file members in meetings for more than a month.
Reconciling With Rucho
Berger knew he now had more than one dilemma. "I thought it was important to do two things," he said. "One: Advance tax reform, but also two: not lose one of the more valuable members of my caucus." So again, the president pro tem got to work. First, he persuaded Rucho that half a loaf was better than nothing.
"Solving the problem means moving away from an onerous income tax system and moving to a broad-based consumption tax on goods and services," Rucho said. "Unfortunately we only got to the first part."
Rucho said he believes lawmakers could get the biggest bang for the buck by lowering the personal income tax to zero and moving to a consumption-based system, adding, "And Senator Berger still believes that is a direction that we need to go."
Rucho said he was disappointed but that he eventually accepted what Berger said, with the caveat that they would revisit the issue, probably in 2015. He came back to the fold, and Berger concentrated on bringing the House and McCrory around. After several weeks, the two chambers of the General Assembly and the governor announced a deal that looked very much like Berger's plan with the exception of a sharply lowered -- not eliminated -- corporate income tax rate. On July 23, 2013, the tax reduction package long sought by North Carolina Republicans became law.
Looking Back . . .
But one year later, emotions regarding HB 998 and Berger's role in its passage still run high.
"What North Carolina did represents one of the three best state tax reforms in the last two or three decades," said Scott Drenkard of the Tax Foundation. "Berger's real contribution was leadership when it seemed like things were stalling. He deserves credit for tenacity."
On January 7 the Tax Foundation named Berger a recipient of its Outstanding Achievement in State Tax Reform for 2013. On its website, the Tax Foundation wrote that Berger "led the legislative effort to enact the year's most significant state tax reform, offering an impressive initial proposal and ultimately crafting the version that became law."
The changes greatly improved North Carolina's standing in both the Tax Foundation's State Business Tax Climate Index and the Rich States, Poor States, Competitiveness Index compiled by the American Legislative Exchange Council.
Jonathan Williams of ALEC said Berger and others deserve credit for "changes that will make North Carolina a better place to live, work, and start a business."
Alexandra Sirota of the North Carolina Budget & Tax Center agreed that HB 998 "is very much a reflection" of Berger's leadership. But she said Berger pursued "a tax plan that really does reduce available revenue for public investment and provides tax breaks primarily to wealthy taxpayers and profitable corporations."
Nick Johnson of the Center on Budget and Policy Priorities said some of the budget troubles the state is having, such as trying to find a way to give teachers the raise they haven't had in six years, stem directly from HB 998. "I sort of expected [lawmakers] would come back later and look at what they had done, maybe put the brakes on," he said, adding that instead he's been "surprised at the extent to which they have actually doubled down," calling for more tax cuts next year.
The situation has also dismayed Sabra Faires of Bailey & Dixon LLP in Raleigh. For six years, Faires was assistant secretary for tax administration in the North Carolina Department of Revenue. Before that she served for two decades as a fiscal researcher and tax counsel to both Democrats and Republicans on the House and Senate Finance committees. She said Democratic administrations weren't able to achieve tax reform, and she doesn't believe it happened this time, either. "They didn't expand the sales tax base. They claim they did it, but all they did was jack the rates up on utility services," Faires said. "They blew the best chance they had at real tax reform. All they did was cut the income tax."
Berger had to step in and "salvage" a bill for his colleagues, Faires said. "They all got out there claiming they were going to do [tax reform], and so he had to salvage these claims that they had been making for a long time," she said.
. . . and Looking Forward
In September 2013 Berger announced that he would not run against U.S. Sen. Kay Hagan (D) (Republican House Speaker Thom Tillis will challenge her), saying the North Carolina General Assembly is the best place for him "to make real progress." He said that in 2015 he will look to reforming the state's franchise tax, continue lowering the individual income tax, expanding the sales tax, and eliminating tax preferences. He said he expects to work with Rucho to achieve those goals.