RALEIGH — Who pays more and who pays less under a major tax bill exposed a sharp divide among lawmakers Tuesday, as the House and Senate voted mostly along party lines to give it preliminary approval.
Republicans leading the effort said the legislation would boost the state’s economy and give every taxpayer a break once it’s fully implemented. But Democrats cited their own numbers to argue that the wealthiest would get the bulk of the tax cuts, while some lower- and middle-class taxpayers may see tax hikes.
The disparate narratives, each backed by their own fiscal analysis, dominated partisan debates in the House and Senate that took place just hours apart.
The House moved first to give the bill preliminary approval, cutting off debate after less than 30 minutes and voting 77-38 with two Democrats in favor. The Senate spent nearly an hour discussing the measure later in the day before voting straight party lines, 32-17.
Both chambers will take final votes Wednesday, sending the measure this week to Gov. Pat McCrory’s desk for his signature.
Under House Bill 998, North Carolina’s personal and corporate income taxes would decrease to match the lowest rates of neighboring states, not counting Tennessee, which doesn’t have a personal income tax. The move shifts the state from a more progressive personal income tax in which higher-income earners pay a larger percentage to a flat 5.75 percent rate in 2015. The corporate tax would fall from 6.9 percent to a 5 percent rate by the same year.
A legislative analysis prepared for Republican bill sponsors looked at specific scenarios to find that the average North Carolina household making roughly $40,000 would see income tax breaks ranging from $80 to $420. Married couples with children would receive the smallest share of the tax cut, with single taxpayers getting more.
At the lower end, a married couple with two children earning $20,000 would essentially break even, while a single taxpayer making $250,000 would save $4,000, or 1.6 percent.
The analysis did not take into account increases in sales tax on some service contracts and amusements where admission is charged, such as movies. The sales tax on electricity also would more than double to 7 percent, though Republican bill sponsors suggested it would have a minimal effect on monthly bills.
“It literally cuts everyone who pays income taxes,” said Rep. David Lewis, a Dunn Republican who led the House tax negotiations.
But House and Senate Democrats asked legislative staffers to conduct separate analyses and used the numbers to poke holes in the bill.
For a married couple with two children making a combined $1 million, the income tax break is between $12,300 and $18,800, a roughly 20 percent cut. The same family making $4 million a year can get a cut up to $78,000, the analysis found.
Rep. Paul Luebke, a Durham Democrat, used the figures to show the top 1 percent of taxpayers would proportionally get the biggest income tax break. “This is a bill that is helpful if you are millionaire; it does not help you if you are in the middle class,” Luebke said.
A few scenarios show that senior citizens on retirement income and small business owners are likely to pay more in income taxes as a result of the legislation.
A married couple with $15,000 in Social Security income and $35,000 from a pension could pay $800 more in income taxes, legislative analysis showed. The bill does maintain the state exemption for Social Security income, despite discussions earlier this year about repealing it, but it removes deductions for medical bills and eliminates a pension tax break in current law.
Another provision tucked into the bill eliminates a $50,000 income exemption for small business owners. It would lead a married couple with two children making $65,000 to pay $2,700 more in taxes, the legislative analysis showed.
Sen. Josh Stein, a Raleigh Democrat, said the scenarios reject Republicans’ assertions that everyone benefits. And he said that most of the breaks from a corporate tax cut would go to shareholders outside North Carolina.
“This represents tax breaks for the wealthy and out-of-state corporations,” he concluded.
The ‘greater good’
To counter the argument, House and Senate Republicans pivoted to tout the plan’s economic benefits.
The bill’s supporters contend lower income taxes would lead to more jobs and economic growth in a state with the fifth-highest unemployment in the nation. Cary Republican Rep. Nelson Dollar called it possibly the “jobs bill of a generation,” even though economists suggest such claims are exaggerated.
Combined with the GOP majority’s other actions this session, Dollar said, it “will lead to a strong, healthier economy in North Carolina.”
But Republican state Rep. Marilyn Avila of Raleigh acknowledged major tax changes can be difficult.
“Any time you are going to change a bill, whether it has to do with taxes or something else, you cannot avoid a small percentage of people being adversely affected,” she said.
Avila said the “greater good” in the plan outweighed any negative effects like tax increases on some payers.