RALEIGH — Senate President Pro Tem Phil Berger on Tuesday unveiled a new plan to rewrite the state’s tax code that walked back from the Senate’s earlier proposal to add a state sales tax to food and expand the sales tax to numerous services.
Berger said this latest version would be a break for most taxpayers, move North Carolina forward economically and avoid some of the concerns that have been raised about earlier proposals.
“It will reduce the tax burden for the overwhelming majority of North Carolinians, including low-income earners and retirees whose sole source of income is Social Security,” Berger told the Senate Finance Committee.
Berger’s plan would lower and then eventually phase out personal income taxes. The current maximum rate of 7.75 percent would be reduced to a flat 5.25 percent in 2015. A new zero-tax bracket would be created on the first $15,000 of income for those married filing jointly.
It would also phase out corporate income tax and the business franchise tax, and would repeal the estate tax.
This latest plan is a rewrite of the House tax proposal, which was approved by House lawmakers Monday night.
Berger introduced the bill Tuesday in the Finance Committee in advance of a vote on Wednesday. It would then go to the full Senate, and return to the House for concurrence.
The House bill didn’t tax food, nor did it expand the sales tax to as many services as the original Senate proposal. The House also had proposed a flat 5.9 percent income tax beginning next year and gradually reducing the corporate tax from 6.9 percent to 5.4 percent by 2018.
Berger said the results of the tax cuts in the new measure – more than $1 billion in the first three years – would still give the state enough money to pay for vital services such as education, roads and public safety.
Democrats were skeptical that the state could sustain such a large tax cut and still provide services that are important to people.
“I think it’s a charade,” said Sen. Daniel Clodfelter, a Democrat from Charlotte, who earlier this year introduced his own tax bill with Fletcher Hartsell, a Republican from Concord. “There are a lot of promises of things to come in future years with no way to deliver on them.”
Clodfelter said the hit on local government would be hard, possibly forcing them to raise property taxes. Currently the sales tax on food, typically 2 percent, is collected by municipalities. Under the Senate’s original plan, the tax would have risen to a combined 6.5 percent rate. Under the new plan, the food tax is phased out by 2016, but counties would be able to add it back starting in 2017 if they wanted to.
Berger said some of the loss of revenue can be offset by slowing the rate of growth for the state budget. He also said the bill would eliminate some loopholes and “unfair, complicated” deductions, credits and exemptions.
The Budget & Tax Center, which advocates for tax laws that are fair to low-income people and disadvantaged communities, notes the estimated loss of revenue available to the state would add up to more than $4 billion over five years, putting public education, roads and safety at risk – “all in order to pay for tax cuts that will benefit the wealthiest taxpayers and profitable corporations.”
The tax reform debate comes as the General Assembly is working on its budget for the next two years, which requires a firm idea of how much revenue will be coming in.
Berger’s chief of staff Jim Blaine said that even with this tax cut, state spending will still increase from $20.2 billion this year to around $23 billion in 2017-2018.
Berger said he still thinks the Senate’s original proposal developed by Sen. Bob Rucho, a Charlotte Republican, has merit. But he said he took into consideration concerns that had been raised and worked those into the bill so that comprehensive reform legislation could advance. Rucho’s bill has been stuck in committee since being introduced.
One such compromise was backing away from a plan to extend the sales tax to services that aren’t currently taxed, including prescription medicine.
Hospital group objects
Other opposition comes from the N.C. Hospital Association, which issued a statement Tuesday evening saying it preferred the House bill because of a provision in the new version that would eliminate the nonprofit sales tax refund for any amount over $100,000.
The free-market Civitas Institute, however, found much to like in the proposal, calling it preferable to the House plan.
“Civitas has advocated for the elimination of income taxes for several months now, and it is encouraging to see the Senate step up and eliminate what many economists believe to be the state tax most harmful to economic growth: the corporate income tax,” Civitas Institute Policy Director Brian Balfour said in a statement.