Lawmakers tussle over taxes

Meanwhile, House leaders contend their plan to raise income and sales taxes would be better for the state.

Gov. Beverly Perdue called on lawmakers Wednesday to raise an additional $1 billion to $1.5 billion to avoid drastic cuts to North Carolina's public schools, community colleges and universities.

Lawmakers have spent weeks slashing spending to erase a projected $4.6 billion deficit in the 2009-10 fiscal year, which starts in July. Now, they're tussling over the revenue side of the balanced budget equation.

After meeting with Perdue, House and Senate leaders agreed to aim for about $1 billion in new revenue in 2009-10 and $1.3 billion in the second year of the two-year budget cycle.

The budget passed last week by the House raised taxes by $784 million, primarily through a quarter-cent increase to the state sales tax and higher income taxes on couples earning more than $200,000 a year.

House Majority Leader Hugh Holliman said Thursday his chamber could add taxes on some services and easily reach target of $1 billion in new revenue.

"People making over $200,000 a year, over $500,000 a year can afford to help during a time as desperate as we are now," said Holliman, D-Davidson.

Senate Democratic leaders said they won't support higher sales or income taxes in a down economy, so they have hammered out an alternative plan.

Under the Senate proposal, sales taxes would be applied to 55 services that haven't previously been taxed. The list, which hasn't been finalized, includes vehicle repairs, lawn care, home renovations, painting, manicures and extended warranties.

"Down the road, North Carolina has got to modernize our tax policy. This is a great start and a great time to do it," Senate Finance Committee Co-Chairman David Hoyle said, noting the state is moving toward a service economy from a manufacturing one.

The Senate would offset the new taxes by lowering the state portion of the sales tax from 4.5 to 3.75 percent and lowering the tax brackets for individual and corporate income taxes. The three individual rates would drop from 6, 7 and 7.75 percent to 5.25, 6.5 and 7.5 percent.

"Some people would pay less taxes under our plan, depending on the range of services that you might use. Some might pay marginally more," said Hoyle, D-Gaston, predicting that the plan would raise the overall tax bill for the average North Carolina resident by less than $100 a year.

"We have to have some revenue. If not, we're going to have to shut the state down. I don't think any responsible citizen wants that to occur," he said. "We were talking with the governor (Wednesday), and she's worried about paying the light bill come January or February. Our cash flows are falling. Our reserves are nowhere. What if we have a hurricane? What if we have a major natural disaster somewhere?"

The Senate plan also would raise taxes on cigarettes by 15 cents a pack and on alcohol by varying amounts. House leaders have opposed such "sin taxes."

"We want to be open-minded," Holliman said. "We want to sit down with the Senate as we have already and start going through (the two plans) item by item. We certainly think our plan has good points, too."

Hoyle said it's a bad time to look at raising income and sales taxes, as House members propose.

"I think it does irreparable damage to the state and at a time we're trying to bring jobs here and we're trying to recruit industry and businesses," he said.

Senate leaders said their tax plan will likely evolve over the coming days – they declined to provide the full list of services they would like to tax – and they hope to present it to various committees next week.