Easley backs off cut in sales tax

Says tax credits might be better

Two weeks ago, Gov. Mike Easley cheered when the first part of a planned half-cent cut in the state sales tax took place, just in time for the holidays.

North Carolinians, Easley said, "will see their hard-earned dollars can stretch a bit farther."

On Tuesday, the governor said it might not be wise to follow through next year with the rest of the cut as scheduled.

As it is now, officials are set to slice another quarter percentage point off that tax in July, reducing it to 4 percent on purchases of everything from clothes to computers.

It has been at 4.25 percent since it was cut from 4.5 percent Dec. 1. Every county except Mecklenburg adds 2.5 percent to that.

Amid state budget troubles in 2001, legislators increased the state sales tax and the income tax applied to the state's wealthiest earners.

Lawmakers said both of those increases were to be temporary but extended them in subsequent years.

But both began to fall off this year, approved by legislators as part of settling the budget.

Easley said Tuesday in a year-end interview with reporters that he still wants to make sure the income tax for those earning $200,000 or more is dropped back to the 2001 level.

But he said that following through on the rest of the sales-tax cut next year would mean a loss of roughly $200 million in annual tax collections for the state.

Easley said the budget can absorb that loss of revenue.

But he added, "Here's the question: Do we really want to?"

Easley, a second-term Democrat, said he wants to explore doing something else with that money, targeting it for lower- and middle-income families.

He mentioned pursuing a tax credit for such families -- something that has been touted in recent days by State Treasurer Richard Moore and Lt. Gov. Beverly Perdue, the two presumed frontrunners for the Democratic gubernatorial nomination in 2008.

But Easley said it could go for college scholarships or some other use. He said he is open to ideas.

"There's all kinds of possibilities," Easley said.

He acknowledged that when "we put them on, we did say they were coming off.

"We ought to try to keep that commitment unless we find a better way to give the money back to the people -- and more so, to those who need it," Easley said.

The talk was met with mixed reaction.

Sen. Ellie Kinnaird, an Orange County Democrat who closely follows tax issues, said she likes the idea of the tax credit.

"But scholarships -- let's worry about that with something else," she said.

Rep. Paul Luebke, a Durham Democrat, is one of many who links the income and sales taxes.

"They came on together, and they should either stay on together or go off together," said Luebke, chairman of the House Finance Committee, which handles tax matters. "It's not a fair tax policy to give the wealthy a tax break and not for the others."

The Republican leader in the Senate, Phil Berger, called the idea a "lump of coal for the taxpayers."

"A promise made should be kept, and they should be taken off," he said. "And the individuals can spend that $200 million across the state a lot better than the government can."

Easley, though, said the savings for each taxpayer are relatively small.

He noted that the tax cut would save someone who spends $750 a total of less than $2.