Far-reaching Senate tax plan closes loopholes, adds sales taxes

dkane@newsobserver.com jfrank@newsobserver.comMay 30, 2013 

  • The competition

    The N.C. Fair Tax Act, introduced Thursday in the Senate, isn’t the only effort to overhaul the state’s tax code this year. There is a competing bill in the Senate as well as a measure in the House.

    Senate Bill 394 is co-sponsored by Sen. Dan Clodfelter, a Charlotte Democrat, and Sen. Fletcher Hartsell, a Concord Republican.

    It creates a flat 5.95 percent income tax rate for individuals and businesses. It expands the state sales tax – at a lower 4.5 percent rate – to services such as car maintenance and lawn care that are currently exempt but doesn’t touch as many services as the N.C. Fair Tax Act.

    “We have very different approaches to the issue, and I don’t think I can tell you right now exactly how it is going to go,” Clodfelter said.

    One of the most important elements of the bill is it remains revenue-neutral, he said.

    “What we tried to do was put forward a bill that’s not aimed at raising money for the state to spend, or giving significant tax cuts to any group of people; we are just trying to … redesign the system,” he said.

    The House GOP tax plan, House Bill 998, has been changed some since House lawmakers first discussed it earlier this month. The version presented Thursday in committee shrinks the personal income tax rate to 5.9 percent and sets a standard deduction at $25,000 for a married couple. It also shaves the corporate tax rate to 5.4 percent.

    It would expand the sales tax – at a slightly lower 6.65 percent combined state and local rate – to more services than the bipartisan Senate bill but less than the Republican effort, taxing repair, installation and maintenance services. It also would tax movie tickets and some other attractions, and levy the full rate on electricity bills, which currently are taxed at only 3 percent.

    Altogether the House’s measure would give the state more than $1 billion less in revenue over five years for education, transportation, health care and other government services.

    “What this bill aims to do is take North Carolina’s tax system, which is extremely complicated, and simplify it,” said Rep. David Lewis, a Dunn Republican leading the effort, which is backed by House Speaker Thom Tillis.

    Staff writer John Frank

Senate leaders on Thursday rolled out the most comprehensive proposal to overhaul the state’s tax code, eliminating dozens of loopholes, but also shutting down popular tax breaks on food, mortgage interest payments and prescription drugs that would bring in more than $1 billion in revenue to help reduce income tax rates and the overall sales tax rate.

The N.C. Fair Tax Act also taxes Social Security benefits for many retirees and extends the sales tax to more than 130 services, such as landscaping and legal help. While it closes many loopholes for businesses, it does continue some for certain sectors while bringing in roughly a billion dollars less in revenues over the next three years.

Gone, for example, is a loophole that lets purchasers of boats and jets pay no more than $1,500 in sales taxes. It costs the state roughly $10 million annually in lost revenue.

But the act also exempts those same boat and jet buyers from the local portion of the state sales tax because they’ll also pay a local property tax. That would be a tax break of 2 percent on the purchase price until 2015, when the local share drops to 1.5 percent.

State Sen. Bob Rucho, a Mecklenburg County Republican and a chief tax writer, said if his plan becomes law, come Jan. 1, “every single soul who pays taxes in North Carolina will have more money in their pockets.”

Some of those who would take a hit disagreed.

At the state’s chapter of the AARP, director Doug Dickerson said the Senate plan hurts retirees in at least three ways. His membership relies on the exemptions for food, prescription drugs and Social Security income. The Senate GOP plan would repeal the first two and tax Social Security for those with other income sources.

“These legislators are gambling with peoples lives,” Dickerson said of Rucho’s plan.

“I don’t want to use expletives on the phone, but you can be very, very sure that our million-plus members in the state would know that Social Security would be taxed by this and would speak up quickly and loudly.”

Rucho has been talking for months about revamping the tax code, and his plan is much more ambitious than two other tax bills also being considered in the General Assembly.

A House bill being championed by Rep. David Lewis, a Dunn Republican and a chief tax writer, and another Senate bill, with sponsors from both parties, also seek to lower overall rates. But both are less aggressive on loopholes and do not create as big a revenue drop. The bipartisan bill is supposed to be revenue neutral. Neither of the competing bills touches food, prescription drugs or Social Security.

While all three bills have their critics, Rucho’s bill faces the most opposition.

Rucho had talked of a plan that would eliminate most loopholes in favor of a general set of rules that leveled the playing field, and there is language that provides sales tax exemptions for business to business transactions, particularly for the many services that would have to start charging sales tax to their customers.

But much of Senate Bill 677 goes at the tax code in a piecemeal fashion. Farmers, for example, would keep their sales tax exemption on feed, only to lose them for pesticides, medications or litter. That change alone would bring in roughly $10 million in new sales tax revenues annually.

Other loopholes closed would require broadcast companies to pay sales on their towers and other equipment, newspapers to charge clients sales tax for advertising supplements, and air carriers to pay sales tax for repair parts and accessories.

In a news conference, Rucho and another chief tax writer, state Sen. Bill Rabon, a Southport Republican, said they sought to eliminate exemptions that were out of line with what other taxpayers get. They said they chopped out a sales tax exemption on farm building materials, for example, because farmers were already getting a capital expense tax break on structures.

Rate to make up for breaks

The Senate plan cuts some of the most common tax breaks to help reduce overall tax rates. The sales tax exemption on food costs the state $622 million a year. The deduction on mortgage interest makes up a significant chunk of the $2.3 billion in standard or itemized deductions that taxpayers take each year. And the state loses $363 million a year by not taxing Social Security income. The plan would tax the benefits of retirees with incomes of more than $32,000 a year.

Rucho and Rabon said people affected by the loss of those tax breaks would still come out ahead because overall tax rates would be lowered.

Mark Zimmerman, a Chapel Hill realtor who leads the N.C. Association of Realtors’ legislative committee, said eliminating the mortgage deduction is not a fair way to go about tax reform. The House plan, which the realtors also oppose, caps the annual deduction at $25,000 worth of interest payments.

“The biggest issue we have with the elimination of this deduction is it impacts the value of homes,” he said.

“Currently, with the deduction, people can buy more home, which boosts the housing sector of the economy, and by eliminating it those valuations will come down.”

The competing tax plans show wide disparities in a state government controlled by Republicans, and suggest a tough battle as lawmakers try to finish their business by early July.

Gov. Pat McCrory said in a statement that he opposes key elements in the Senate plan, such as taxing food and medicine.

He said the other two bills “are closest to my position.”

Comparing the bills

State lawmakers took a look at three competing tax bills:

House Bill 998Senate Bill 394Senate Bill 677
Personal income tax (currently 6-7.75 percent)Flat 5.9 percentFlat 5.95 percent in 2015Gradual decrease to 4.5 percent in 2016
Corporateincome tax (currently 6.9 percent)Gradual decrease to 5.4 percent in 20185.95 percentGradual decrease to 6 percent by 2016 and reconfigures how tax is formulated to provide a tax break for some businesses
Sales tax (4.75 percent state, typically 2 percent local) 6.65 percent combined state and local rate, expanded to cover some additional repair, installation and maintenance services currently exempted6.5 percent combined rate, expanded to cover some services and goods that are currently tax free6.5 percent combined rate applied to food, prescription drugs and roughly 100 more services that are currently exempt
Revenue projectionsReduces state tax revenue $1.1 billion over five yearsRevenue neutral, no new money and no cut in overall tax receiptsCuts more than $1 billion over three years


Kane: 919-829-4861

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