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RALEIGH — When lawmakers finish their annual session this week, they will be taking home a big piece of homework: tax reform.

North Carolina’s tax code hasn’t undergone a comprehensive rewrite in decades and no longer fits with the state’s rapidly changing economy. As a result, mercurial swings in the tax revenue make for cycles of flush times followed by difficult-to-bridge deficits.

Gov. Bev Perdue signed a $19 billion budget into law Friday that includes both budget cuts and $1 billion in new taxes, including a temporary 1 cent increase in the sales tax and surcharges on high-income earners.

“Even if we had an up-to-date tax code, we would have had a problem this session,” said Ran Coble, who heads the nonpartisan Center for Public Policy research.

States across the nation have struggled to make ends meet amid economic upheaval. But North Carolina’s problems have been exacerbated by the aged tax code, he said.

If done right, lawmakers and experts say, North Carolina could lower the tax rates — the percent of income for a particular sales transaction paid in taxes — and still collect the same amount of money. In trade, more items would have to be taxed.

North Carolina taxes relatively few items compared to other states. For example, the service sector makes up more than half the state’s economy but it is largely untouched by revenuers.

This idea of “broadening the base and lowering the rate” has been a mantra for tax writers all year, especially senators who hoped a tax code rewrite would allow them to avoid a tax increase. But House lawmakers balked at the Senate plan.

The budget agreement calls for the House and Senate finance committees to draft a new tax blueprint this fall.

“I would like to have done it last year,” said Sen. Marc Basnight, a Manteo Democrat and the top leader in the chamber. “I believe it should occur in the fall. But that will be up to the House and the governor in concert with myself.”

In remarks in the spring, Perdue said she was open to hearing about tax reform proposals. And House leaders said they were willing to work with the Senate on reforms.

“We’re in philosophical agreement with them,” said Rep. Hugh Holliman, a Lexington Democrat and the House majority leader.

House leaders balked at considering tax reform proposals this year, he said, because there was too much going on and the final result would have been rushed.

“I have some concerns about the direction they’ve been taking tax reform in,” said Sen. Phil Berger, an Eden Republican and his party’s leader in the Senate.

Any tax reform bill should be “revenue neutral,” he said — that is, it should collect the same amount of money as the current tax code.

“What the Democrats have done with that concept is create a tax increase masquerading as tax reform,” Berger said.

But Sen. Dan Clodfelter, a Mecklenburg Democrat and the architect of a draft tax reform plan, said that any tax reform during the fall would be revenue neutral.

“We’re not going to produce something that puts the budget out of balance or creates more revenue than we need,” Clodfelter said.

The disagreement may be as much political as it is philosophical. The 2010 elections will be particularly important because they will determine who draws the state’s legislative boundaries.

Republicans, currently the minority in both the House and Senate, hope to combine rhetoric about this year’s tax increase with other factors and win control of at least one chamber in the legislature.

But successful tax reform would allow Democrats to claim they lowered taxes — or at least tax rates — in advance of the 2010 election.

“I think revenue neutral means different things to people in different political parties right now,” Coble said. “But that discussion is far down the road.”

For now, he said, Republicans and Democrats need to come to grips with the fact that North Carolina’s tax code is based on a model lawmakers established in the 1930s. It was designed to draw revenue from what was a growing manufacturing schedule and largely eschewed taxes on services.

It also envisioned purchases being made person to person. But with almost anything available online, an increasing number of sales avoid being taxed.

Even income taxes, which are supposed to be among the most fair, have come out of balance, Coble said. A tax burden that at one time fell more on businesses and high-income earners has shifted down the income scale.

“A large number of North Carolina taxpayers pay at the 7 percent rate,” Coble said, referring to the middle income bracket. “In the 1930s, when they passed that tax structure, even the governor didn’t make enough to pay taxes.”

Rank-and-file members of the General Assembly were happy to be heading home last week, but they seemed willing to return if they could straighten out quirks in the tax code.

“I hope we do come back for a special session and take care of this,” said Sen. Don Vaughan, a Greensboro Democrat. “It’s time we did it. No longer do we have an economy based on tobacco, furniture and textiles. Our taxes should reflect that.”

Contact Mark Binker at (919) 832-5549 or mark.binker@news-record.com