House approves tax on e-cigarettes and caps tax on local businesses

jfrank@newsobserver.comMay 20, 2014 

— In the first major vote this session, the N.C. House advanced a bill to cap local taxes on businesses and put a new, modest tax on electronic cigarettes.

The $100 cap on local privilege taxes pitted supporters who wanted to cut the taxes on businesses against critics who worried about the millions that some cities and towns would lose for essential services, such as police, fire and public recreation.

The new e-cigarettes tax, pushed by the tobacco industry, also split lawmakers who were challenged by how to regulate an emerging product in a state with a rich tobacco legacy and where the industry is a powerful political player.

The two measures dominated the discussion about a wide-ranging tax bill that won preliminary approval in the House with a 83-35 vote. A final vote is expected Wednesday to send the bill – H1050 – to the Senate for consideration. On the sidelines is Gov. Pat McCrory, a former Charlotte mayor who once defended the business privilege taxes. He remains uncertain on whether he supports the measure because of the hole it creates in city and town spending.

A separate measure to cap county property taxes – tucked into a fracking bill – died in a Senate committee Tuesday, though lawmakers pledged to continue to study the issue.

But e-cigarettes, more than local taxes, generated the most contentious discussion in the House. Lawmakers were divided on whether to classify the vapor cigarettes as tobacco products and how much to tax them – a microcosm of a larger debate at the national level as the Food and Drug Administration studies new regulations.

The legislation – supported by Winston-Salem-based cigarette maker Reynolds American – would charge 5 cents per millileter of the liquid in the battery-powered devices, far less than the 45-cent tax for each pack of cigarettes.

Rep. Julia Howard, who sponsored the bill, said lawmakers negotiated the tax rate with the industry, which is currently only subject to sales tax.

The Mocksville Republican said a company is preparing to announce 300 new jobs at a factory focused on developing e-cigarette products in coming days. “This is a new job (creator) and a new concept for North Carolina which we welcome,” she said.

Democrats criticized how the e-cigarette portion of the bill emerged just days ago and faced little scrutiny. But an effort to remove the section from the larger bill failed. However, an amendment to clarify that e-cigarettes are tobacco products and not legal for minors, passed by a wide margin.

Rep. Becky Carney, a Charlotte Democrat who led the opposition, said the tax is too low. “Yeah, a nickel is great for industry, but what about those revenues in North Carolina that we will potentially lose,” she said.

She also argued that the state should wait for the FDA to set rules on e-cigarettes before taking action, a point echoed by Rep. Rick Glazier, a Fayetteville Democrat who helped author a provision in 2013 to prohibit the sale of e-cigarettes to minors.

Glazier said the health questions are too great to know what is an appropriate tax at this point. “From all of the data we have, what we know is a whole lot less than what we don’t know,” he said.

The privilege tax cap generated plenty of attention ahead of the vote but drew little discussion on the floor.

More than 300 cities and towns across North Carolina levy a privilege tax. It is a significant revenue source for major cities such as Charlotte, Raleigh, Greensboro and Durham and generates $60 million a year statewide, legislative analysts report.

The legislation would cost municipalities between $11.4 million and $24.6 million a year, a move that some cities say may lead to a property tax hike to offset the loss in revenue.

Republican leaders argued that the annual tax on businesses hurts economic development and creates inequities because some businesses pay more than others.

Democrat Rep. Paul Luebke of Durham said the legislation, which would take effect July 1, 2015, went too far. “I think it is simply unfair to our cities that we do not hold them harmless,” he said.

Ten Democrats sided with the majority Republicans to pass the bill and three Republicans voted against it. House Speaker Thom Tillis did not vote but a spokeswoman said he supported the legislation.

Rep. Nathan Ramsey, a Fairview Republican, supported the measure, but as a former county commissioner, he expressed concern about the effect on local governments.

“We don’t really know” the effects, he said in an interview after the vote.

Frank: 919-829-4698

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