Raleigh, N.C. — North Carolina would do away with corporate income taxes and lower individual income tax rates under a tax reform proposal that cleared the Senate Finance Committee Wednesday.
The measure, which is likely headed to a floor vote next week, raises $4 billion less than the current system over the next five years, slowing how rapidly state spending can grow. It offsets some loss of income tax revenue by raising sales taxes on utilities and shifting some taxes that currently go to city and county governments to state operations.
Senate President Pro Tem Phil Berger, who unveiled the bulk of his plan Tuesday, said it will put the state "in the forefront of the competition for jobs."
The House has already passed its version of tax reform, and it's likely a conference committee will be needed to work out differences between the two chambers. As with almost any tax bill that's been floated over the past few years, there was instant opposition.
Some of the negative comments were predictable. A movie theater owner, for example, objected to imposing sales taxes on movie tickets. Local government groups are upset with a tax shift that could require them to raise local taxes. Liberal budget analysts complained that the bill gives the biggest breaks to high-income earners.
More surprising, Sen. Bob Rucho, R-Mecklenburg, who has been one of the leading proponents of rewriting North Carolina's antiquated tax system, announced that he opposed the version put forward by Berger.
"If you don't make the transition over to a comprehensive, broad-based plan ... then you're not achieving comprehensive tax reform," Rucho said.
The Berger bill backs off a key feature of virtually every other reform plan put forward this year. Those plans expanded the sales tax base – applying consumption taxes to more items and services – in order to set the state on a path toward eliminating the income tax.
The Berger plan, Rucho said, is not comprehensive enough.
"It actually works against the direction we want to move," he said. "I don't believe this bill, the way it's written now ... is not fair and right pathway and should not be supported. And under those circumstances, it hurts me to say to you, but I cannot support this bill."
Berger, R-Rockingham, said he agreed with many of the points Rucho made but still encouraged fellow lawmakers to back the measure, saying it moves the state in the right direction and can meet the test of current political realities.
"We've got to do something. This is the something that's available to us," he said.
The committee did not take a formal count of the votes, but a voice vote appeared to be close.
Debating the numbers
Tax bills are notoriously complicated, and various groups scrambled to assess the impacts Tuesday and Wednesday.
Mary Bethel, advocacy director for AARP, said that provisions in the bill that would tax Social Security income the same way it is taxed under federal law raised "red flags."
Senate staffers scrambled to respond to her concerns, saying that, despite the changes to legislative language, there would be very little change in the taxes paid on those federal pensions.
Under 10 different scenarios analyzed by the legislative staff "the Social Security recipients will pay either the same tax or less tax under the Senate plan when compared to North Carolina’s current tax code," wrote Jim Blaine, Berger's chief of staff.
The North Carolina League of Municipalities, which represents city and town governments, raised objections to two major provisions. One part of the bill ends the electricity franchise and piped natural gas tax distributions. It also exempts food from local sales tax, although it gives county governments the chance to reimpose that tax. In all, the bill would cost cities $150 million.
Opponents of the bill say this loss of money will simply prompt cities to raise other taxes. Raleigh, for example, would lose nearly $10 million in 2017-18 and $18.5 million in 2018-19. The city would need to raise property taxes to offset those changes, according to the league.
"We know that property owners are going to have to pay because localities are going to have to offset these losses," said Sen. Josh Stein, D-Wake.
Berger said that wasn't true. The bill, he said, would work out to be revenue neutral for cities and counties, especially if they choose to re-implement the local sales tax on food. He added that cities could always choose to reduce spending.
Other critics said the plan gives tax cuts to the wealthiest at the expense of low-income individuals and families.
Half of the benefits of the income tax changes, said Alexandra Sirota of the N.C. Budget and Tax Center, would go to the top 1 percent of earners. She was also critical of provisions eliminating the corporate income tax.
"The vast majority of cuts will be exported to shareholders outside the state," Sirota said.
Nonprofits get longer lead time
Although the bill is substantially the same as Tuesday, it does make one major change for nonprofits. It gives nonprofit groups four years, rather than three, to adjust to a loss of their sales tax exemption.
"It will help our hospitals," said Sen. Jerry Tillman, R-Randolph. "All of us have been hearing from them and others."
Hospitals are some of the biggest employers in any county, and caps on sales tax refunds will cost them millions of dollars every year. Stein said that each hospital in Wake County will lose $10 million a year once the tax bill fully takes effect.
Sen. Clark Jenkins, D-Edgecombe, said the amendment would merely "delay the pain" but would be especially harmful to rural hospitals.
Another amendment zeroed out a tax rebate that cigarette companies receive for filing their tax reports on time.
As they wound up their discussion, backers of the bill said that it wasn't their ideal measure, but it was better than doing nothing.
"If we're not willing to do something this year on tax reform, I'll predict that tax reform will go away for the next 10 years because nobody will have the nerve to bring it back up and try it again after what's happened this year," said Sen. Harry Brown, R-Onslow.