NC Senate makes "final" tax offer

jfrank@newsobserver.comJuly 1, 2013 

  • Comparing the tax plans

    The Senate’s latest proposal to revamp the tax code is designed to compromise with the House’s position. But the two Republican-led chambers are still deadlocked in the negotiations. Here’s a look at key shifts to move the Senate plan closer to the House and the major differences that remain.

    Key Changes

    • No longer includes a state tax on Social Security income, preserves current exemption.

    • No change to local 2 percent food tax.

    • Applies a sales tax to service contracts, with some exceptions, starting next July.

    • Allows unlimited charitable contributions and a deduction for mortgage interest and property tax capped at $15,000 for those who itemize.

    • Adds a one-year cap on the gasoline tax at 37.5 cents.

    Key Differences

    • Eliminates the 6.9 percent corporate income tax in 2018. The House lowers it to 5.4 percent.

    • Caps the sales tax refund for nonprofits, phased down to $2.85 million in 2018. The House imposes no cap.

    • Changes how businesses are taxed by lowering the franchise tax and moving to a business privilege tax on all entities.

    • Imposes sales tax on newspapers and vending machines, and eliminates the sales tax holiday for back-to-school.

— With Republican lawmakers still deadlocked on a major tax bill, Senate leaders are moving forward alone.

Presenting what he called a final offer, Senate President Pro Tem Phil Berger debuted a compromise proposal Monday that moves closer to the competing House plan and predicted his chamber would approve it this week.

“We think we’ve reached a point where continued discussions are probably not going to modify things that much, if at all,” the Eden Republican said. “The Senate needs to go ahead and move forward with a tax plan.”

The Finance Committee approved the new proposal on a voice vote, and the full Senate will consider the measure Tuesday. The House is not meeting in full sessions this week, and Speaker Thom Tillis’ office did not respond to questions.

Berger called his plan “substantial movement” toward the House’s vision for a tax overhaul, but major differences remain. The Senate’s stance also complicates crafting a state budget for the current fiscal year. Who pays more and who pays less under the plan is unclear as fiscal projections were not immediately available.

One significant obstacle is the plan’s price tag. At full implementation in fiscal 2018, the Senate plan would mean $1 billion less revenue to pay for government services such as transportation, healthcare and education. It is essentially double the cost of the House plan and a major sticking point for Republican Gov. Pat McCrory, who said the plan needs to ensure enough tax money to fund his priorities.

Sen. Josh Stein, a Raleigh Democrat, made a similar point in committee Monday to criticize the plan’s move away from a tiered income tax to a 5.75 percent flat rate. He said it gives a disproportionate share of the benefits to wealthy taxpayers and cuts government revenue too much. “I just don’t think this is a sound way to do fiscal policy in North Carolina,” he said before voting against it. “We need to make sure we have enough for critical services.”

Without any changes, state revenue is expected to grow 4.5 percent in the next two fiscal years. Berger’s plan would lower spending growth to 3 percent at first and later 4 percent.

“One of the key differences that many of us have on the issue of size of government and growth of government is how much is enough,” Berger said. “It is my opinion that this is enough.”

The major concessions in the new Senate plan include no state tax on Social Security, a lightning rod in the original plan that spurred political blowback. Other changes would maintain local government privilege taxes, allow unlimited charitable deductions for those who itemize, and offer a $15,000 maximum break for mortgage interest and property taxes – all points that drew loud opposition in the plan’s previous iteration.

It also includes a compromise personal income tax rate at 5.75 percent, which is about midway from the House’s proposal for 5.9 percent and the Senate previous position at 5.25 percent.

But the differences between the House and Senate are still considerable.

The Senate plan still gradually eliminates the state’s 6.9 percent corporate income tax, which the House maintains at 5.4 percent. Senate lawmakers also want to significantly lower the state franchise tax on businesses and eventually replace it with a privilege tax on all business entities. The House only moderately lowers the franchise tax.

Another significant sticking point is the Senate’s cap on the sales tax refund for nonprofits. The latest plan raises the tax break cap to $2.85 million at full implementation, a big shift from the previous $100,000 ceiling. The House proposes no changes to the tax break.

Berger said it would allow small and rural hospitals to get the full tax break. He also noted a separate provision to preserve UNC Hospitals’ tax-exempt status.

But Sen. Floyd McKissick, a Durham Democrat, worried about the hit on Duke Hospital, saying it would cost them an additional $40 million a year and further drive up health care costs.

Berger said major hospitals make a considerable profits and pay their executives huge salaries. He said any change is likely to be less than a 1 percent hit.

Frank: 919-829-4698

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