House, Senate differ on how to pay for NC tax cuts

jfrank@newsobserver.comMay 16, 2013 

Grover Norquist, right, a conservative libertarian and founder and president of Americans for Tax Reform, speaks to the media Thursday at the N.C. General Assembly, addressing issues of tax reform with Republican Sens. Bob Rucho, left, and Phil Berger.


— The divide between legislative Republicans over how to revamp the state’s tax code became clear Thursday as House leaders unveiled their plan, calling it a more measured approach than one outlined last week by the Senate.

The House legislation offers smaller income tax cuts in exchange for fewer new taxes on services. Supporters pledged it would give a break to all taxpayers, but the numbers remain unclear.

It contrasts greatly with a sweeping Senate proposal that some experts believe could leave many people with a tax hike, a point its supporters dispute. The Senate has not yet introduced a bill in support of its plan.

“We think our tax plan is a lot simpler in terms of the expansion of the sales tax base,” said state Rep. David Lewis, a Dunn Republican leading the effort. “We think it makes sense to people.”

Backed by Speaker Thom Tillis, the House plan would trim the state’s income tax rate, which ranges from 6 percent to 7.75 percent, to a flat 5.9 percent. It also shaves the corporate tax rate from 6.9 percent to 6.75 percent and adjusts how it is calculated.

The Senate proposes much deeper tax cuts, pushing down the personal income tax rate to 4.5 percent and the corporate tax rate to 6 percent after three years.

But the biggest difference between the two plans is how to pay for the cuts.

The current state sales tax exemption on food and prescription drugs would remain in the House plan, while the Senate would tax both, generating $1 billion in revenue annually.

To offset the loss of revenue from its cuts, the House would expand a new combined state and local 6.65 percent sales tax to an assortment of alteration, repair, maintenance, cleaning and installation services that now charge tax for products but not for labor . The Senate is considering going further by applying a combined state and local 6.5 percent sales tax rate to more than 130 services, including professional services such as physicians and attorneys, that aren’t currently taxed.

“It will not create the extra burden on businesses that are not currently collecting the sales tax,” Lewis said, explaining the House’s different approach. “Those businesses (that would pay the new tax ) are already equipped, set up and accustomed to collecting and remitting sales tax.”

The House plan reduces state revenues by $1.2 billion over five years, compared with the Senate plan’s $1 billion cut over three years.

Even with both chambers on divergent paths, Lewis said, they are headed in the same direction, making a compromise possible in the final weeks of the legislative session.

“We are still optimistic that we can reach a consensus of agreement on a good tax plan,” he said.

Senate leader Phil Berger, the chief architect of the competing plan, defended his chamber’s approach Thursday.

“I do think there is a concern that if what you are going to do is try to reform the tax code, … the more you broaden the base, the more you lower the rates, the more likely you are to have the kind of economic reform that we hope tax reform will help lead to,” the Eden Republican said.

Berger declined to discuss in further detail the Senate tax plan. And he could not guarantee that it won’t raise taxes on the majority of people in the long run, as analysis by some tax experts suggests is possible. “My expectation is that in year four, year five, year six, you will continue to see the benefits of the plan,” he said.

Republican Gov. Pat McCrory has declined to stake out his own position on the tax rewrite.

“The House plan, combined with other proposals, provides several options that will allow us to develop competitive tax reform which is fair to North Carolina families, attracts job creators, and provides certainty that will encourage home-grown businesses to expand,” McCrory said in a statement Thursday, pledging to work with both chambers’ leaders.

GOP leaders all want to make the state’s tax rates more competitive compared to its neighbors. The Senate plan would make the state’s highest-in-the-Southeast personal income tax the lowest compared to bordering states, and move the corporate tax into the same realm. Under the House plan, the personal income tax rate would rank in the middle, and the corporate tax rate would remain the highest among North Carolina and its neighbors.

Republicans want eventually to eliminate income taxes, but shied away from doing so in these plans because of the cost. Grover Norquist, president of Americans for Tax Reform, visited Raleigh on Thursday to push the lawmakers.

“I think North Carolina is poised to jump out ahead of other states,” he said, trumpeting the bolder Senate plan as a national model.

But Democrat Rep. Paul Luebke of Durham opposes eliminating the state’s current tiered income structure, which levies higher taxes on the more wealthy. “Those couples who have more than $100,000 taxable (income) really ought to pay more than a family making $30,000,” he said. “Flattening the income tax is not fair to the majority of North Carolinians.”

Richard M. Bowden, owner of City Market Barber & Style Shop in downtown Raleigh, would prefer the House plan because it wouldn’t force him to charge sales tax. Customers would keep getting haircuts, he said, and he’d hate to charge more.

“It’s tough, though, when you start taking money from the little guy – from the working people,” Bowden said with a customer in his chair and about six others waiting. “They already take a big-enough blow. It’s just another blow to the working class.”

It appears the Senate and House plans would tax housecleaning services, but Deb Pope, who owns the Cary Clean Team cleaning service with her husband, is open-minded. Her customers would notice if their bills went up, she said, but she personally prefers a flat tax. “The more you buy, the more you pay,” she said.

Most of their work is residential, but they clean a few small offices.

“My clients would prefer that their rates remain the same,” she said, but a drop in the personal income tax may balance the sales tax increase.

The House plan attempts to avoid disproportionate effects on lower-income earners, many of whom would pay more taxes under the Senate plan.

The legislation would double the current standard deduction, making it the largest in the Southeast, Lewis said. Married couples filing jointly could claim a $12,000 deduction, while a head of household could qualify for $9,600 and a single taxpayer could get $6,000. The state’s $100-per-child tax credit also would increase to $250 for most taxpayers and $125 for higher earners.

“We think we’ve done a lot to try to mitigate any excessive burden on the poor,” Lewis said.

But Alexandra Sirota, director at the N.C. Budget and Tax Center, which advocates for low-income residents, remains concerned about cutting state revenues.

“The House tax plan will put at risk funding for educating our kids, maintaining our natural resources and keeping our communities safe, all in order to provide the wealthiest North Carolinians with tax cuts,” she said in a statement.

Staff writers Lynn Bonner and Craig Jarvis contributed to this report.

How the proposals compare

State revenue cuts$1.2 billion over five years$1 billion over three years
Personal income tax (current 6-7.75 percent)5.9 percent4.5 percent in 2016
Corporate income tax (current 6.9 percent)6.75 percent6 percent in 2016
Combined state and local sales tax (current 6.75 percent)6.65 percent6.5 percent
Scope of services taxedLimitedMostly unlimited
Estate taxEliminatedEliminated
Franchise tax (current $1.50 per $1,000)$1.35 per $1,000$1.35 per $1,000
FoodMaintains exemptionApplies 6.5 percent sales tax
Prescription drugsMaintains exemptionApplies 6.5 percent sales tax
Nonprofit tax exemptionMaintains sales tax exemptionGradually repeals exemption
Social Security incomeNot taxedTaxed if not sole income source
Existing tax loopholesEliminates someEliminates most

Frank: 919-829-4698

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