Senate's budget calls for reduction in state sales tax

RALEIGH, N.C. — The final version of a Senate plan to raise more than $500 million to help close the state's projected $3 billion budget deficit would decrease the state sales tax from 6.75 percent to 6 percent but broaden it to include some services not currently taxed.

Details of the plan released Wednesday also reduce the corporate tax rate from 5.8 percent to 4.5 percent over two years and increase the cigarette tax by 15 cents per pack and other tobacco products by 3 percent.

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Senate's budget would tax more services

Senate Finance Committee Co-Chairman Sen. Daniel Clodfelter, D-Mecklenburg, said that by broadening the tax base, every major tax rate is lowered, including the sales tax and income tax.

"Instead of some things being subject to a high sales tax, more things will be subject to a lower sales tax," Clodfelter said. "It's as simple as that."

Landscaping, pest control, home repairs and auto repairs would be among the services that would be taxed at a 6 percent rate, while professional services, such as legal assistance and accounting, would remain tax-free.

"Why do we have a tax on movie tickets but not admissions to amusement parks? We couldn't come up with a good reason for that, so we said that if we tax them both, we can lower the tax," Clodfelter said. "That's what we did. We picked services that are like services that are already subject to tax in North Carolina."

The Senate's plan to change and broaden the tax rate structure is different than that of Gov. Beverly Perdue. In her $21 billion budget proposal, she wants to bring in additional revenue by increasing the so-called sin tax on alcohol by 5 percent and cigarettes by $1 per pack.

The Senate has said that should not be the only new revenue source. While it would help fill the budget shortfall, the proposed change in the tax rate structure would help stabilize the state's revenue stream in the long-term.

"We've been patching that revenue system and putting Band-Aids on it and stitching it together and holding it together with string and baling wire," Clodfelter said.

What the plan does not do is get rid of the 2 percent groceries tax. Earlier versions of the plan called for lowering or eliminating it altogether.

Other changes include capping mortgage and charitable donation credits, taxing some nonprofits and implementing a franchise tax that would affect most businesses.

"The plan is going to get a huge amount of criticism, because so many people are involved," said Finance Committee member Sen. Neal Hunt, R-Wake. "Everybody's getting gored a little bit."

Hunt said he believes it is time to restructure the state's tax system, but he's not convinced the current Senate plan is the right one.

"You can poke holes in this thing all day," he said. "And it's easy for me to do that."

The Finance Committee co-chairs said they expect there will be changes to the plan. It could be two weeks or more before there is a vote.