Cigarette Tax Increase, Lottery Included In Senate Budget Plan

Senate Democrats met for more than three hours behind closed doors before agreeing to a spending plan that would generate about $700 million in new or extended taxes for the roughly $17 billion budget. The money is designed to help narrow a potential budget shortfall of $1.3 billion in the upcoming fiscal year.

Senate leader Marc Basnight, D-Dare, said most of the new money would benefit education and health programs, which take up more than half of what state government spends annually.

The Senate hopes to approve the budget proposal this week. The bill then would go to the House, which will recommended its own spending plan. A final budget is supposed to be in place before July 1.

Democrats, who have a 29-21 majority in the Senate, agreed to raise the cigarette tax from 5 cents per pack to 40 cents. Senate Democrats had disparate views on how high it should go. Just Monday, there seemed to be a consensus on a 25-cent increase.

"This has been a slow progression upward," Basnight said. "We ultimately settled on 35."

Democratic Gov. Mike Easley wants a two-tiered increase that would raise the cigarette tax to 50 cents by the middle of next year, but the Senate proposal keeps the tax at 40 cents throughout the two-year budget.

The budget bill, the full details of which will be released later Tuesday, would also create a state lottery, with most proceeds benefiting Easley's education initiatives and school construction. A ban on lottery advertising, included in the stand-alone lottery bill approved by the House last month, was removed.

Using the budget to create the lottery, along with changing the allocation of lottery profits and including the video-poker ban, may make it more difficult for supporters to push a lottery through the House a second time. The Senate has approved a similar video-poker ban three times since 2000, but House Speaker Jim Black, D-Mecklenburg, hasn't gone along.

The budget proposal also makes permanent a temporary half-cent sales tax increase approved in 2001, and cuts the corporate tax rate to 6.9 percent - currently the highest in the Southeast - from 6.4 percent.

Local school districts would lose construction money that's earmarked from the corporate income tax. In exchange, Basnight said, the districts would get to divvy up $70 million in lottery proceeds in fiscal year 2006 and $150 million in 2007 for construction debt.

The rest of the lottery's net revenues - potentially $300 million in 2007 - would benefit Easley's class-size reduction and More at Four preschool programs, as well as other unnamed education priorities.

The Senate budget would also phase out over two years the temporary 8.25 percent individual income tax bracket, dropping it to 7.75 percent by 2007.

Basnight defended the decision to cut individual and corporate income taxes - likely to help the wealthy and corporations - while extending the sales tax increase and creating a lottery, which opponents said would disproportionately hurt low-income residents.

Basnight said budget's new revenues would help fill spending shortfalls in education, which benefit all North Carolina residents.

"The money that we're generating in the state primarily is going to education," he said. "So it's for those people that you need to get trained, prepared to go to work.

"The society that served itself best is the society with the best education," he added.

Senate Democrats also agreed to many of the tax changes recommended by Easley as part of a coordinated agreement with other states to streamline tax definitions.