A proposed change to the North Carolina constitution that would reduce its cap on income tax advanced in the state Senate over objections that it could hurt the state when it faces financial crises or natural disasters.
Senate Republicans want three changes to the constitution: capping the personal and corporate income tax rate at 5.5 percent; limiting the cases in which governments can use eminent domain to take property; and protecting the right to hunt and fish. The questions would be on the November ballot.
Monday’s debate centered on the income tax cap, which Republicans said would make fiscal discipline part of the state’s framework, but which some Democrats said would hamstring future legislatures when crises hit. The provision would also require the legislature to put 2 percent of what it spends each year into an emergency fund. Dipping into the emergency fund would require approval from two-thirds of the House and Senate.
House Bill 3 passed a crucial vote 32-17. The Senate is expected to vote on it again Tuesday before sending it to the House for consideration.
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The state Treasurer’s office sent senators a memo warning that the income-tax cap and restricted access to the emergency fund could hurt the state’s AAA credit rating.
Sen. Jay Chaudhuri, a Raleigh Democrat and former lawyer in the Treasurer’s office, summarized those concerns during the debate.
The changes would weaken the factors agencies such as Moody’s consider when evaluating credit-worthiness, Chaudhuri said.
“This bill has a real a potential to put our AAA bond rating at risk,” he said. The bond rating affects interest rates when the state borrows.
Republicans were skeptical about an income tax cap leading to a rating downgrade. The state has a 10 percent cap in the constitution that has not affected ratings, they observed.
Sen. Bob Rucho, a Mecklenburg County Republican involved in rewriting tax law, said the constitutional amendment reinforces the state’s move away from income tax and toward consumption taxes.
“We’re on the right path,” he said. “This is another step in that direction.”
Sen. Floyd McKissick, a Durham Democrat, said the income tax cap would limit the state’s response to unforeseen recessions and natural disasters.
“The problem is none of us have the capacity to know the future,” he said.
The state responded to the last recession and the $3 billion deficit that developed by raising income taxes and sales taxes, McKissick recalled. If an income tax cap had been in place, the legislature would have had to raise the sales tax to 10 percent or 11 percent, he said.
“We should be about preserving our options,” McKissick said, rather than “put financial handcuffs on ourselves.”
Sen. Jerry Tillman said the tax policies Republicans initiated are improving the state’s economy.
“Democrats probably won’t like this bill because it restrains your spending,” the Archdale Republican said.
Alexandra F. Sirota of the left-leaning Budget & Tax Center said it was wrong for the legislature to restrict choices of future lawmakers.
“By placing these changes into our Constitution, they are not seeking to bring greater democracy to the budget process, but instead to lock in their choices and limit the choices of North Carolinians tomorrow, 10 years, and 100 years from now,” she said in a statement.