News & Observer: NC Senate Approves Latest Tax Plan, Still Differs with McCrory and House

By John Frank

RALEIGH — Once again, the state Senate approved a measure Tuesday to trim income taxes and limit government spending. And once again, it may not matter.

Gov. Pat McCrory and House Speaker Thom Tillis remain hesitant about the legislation crafted by their Republican brethren, with neither willing to endorse what the Senate calls its final offer in the months-long tax negotiations on a key legislative issue.

The Senate’s 32-15 preliminary vote, mostly along party lines, came as a new fiscal analysis showed that the average North Carolina family would get a modest income tax break while wealthy taxpayers are likely to see a significant cut.

A married couple with two children making $40,000 would see an estimated $30 tax cut, while the same family making $250,000 would get a roughly $3,800 tax break, the legislative analysis showed.

One segment – a family of four earning $20,000 – would pay slightly more income taxes. But all married couples with no children, single parents and single filers would see a significant tax cut, with those earning more than $100,000 getting the largest breaks.

Even with the income tax cuts, everyone will pay more in sales taxes. The Senate bill increases the sales taxes on electricity and repeals tax breaks on service contracts, movie tickets and other items.

Democratic lawmakers opposed to the measure focused on the shift in tax burden in the hourlong debate.

“This bill is not tax reform,” said Sen. Josh Stein, a Raleigh Democrat. “This bill is a tax cut for the wealthy and large out-of-state corporations on the back of middle-class taxpayers and working families.”

Senate President Pro Tem Phil Berger said the Democrats were engaging in “class warfare.” Along with other Republican supporters, Berger emphasized the need to shrink the state’s high personal and corporate income tax rates to spur economic development, even though a UNC economist recently suggested such claims were exaggerated.

“It is my belief … that passing this substantial tax reform and substantial tax reduction to allow the people of North Carolina and the businesses of North Carolina to keep more of their money is going to have a substantial positive impact on our economy and a substantial positive impact on job creation,” Berger said.

Cost to North Carolina

Under the legislation, the tiered income tax system that requires higher earners pay more would be replaced by a flat 5.75 percent rate. The state’s 6.9 percent corporate tax, the highest in the region, would be phased out entirely.

To offset the plan’s cost, the state sales tax on electricity would increase from 3 percent to 4.75 percent, generating more than $400 million in new revenue a year. But at the bottom line, it represents a significant reduction in tax revenues, starting at $174 million in the first year and reaching more than $1 billion at full implementation in 2018.

Much of the debate Tuesday focused on whether the state can afford such a tax cut and still pay for necessary government services such as education and health care. The plan trims state spending growth from the current 4.5 percent rate to 3 percent in the first year, and then gradually increasing to 4 percent.

“To keep cutting and cutting and cutting on the backs of people who are hurting … we are putting our state in a less competitive position,” said Sen. Floyd McKissick, a Durham Democrat.

Berger responded by saying the plan puts government spending at a “more responsible rate.”

Republicans divided

The plan’s price remains a sticking point. McCrory expressed concern recently about the Senate’s desire to cut taxes so deeply. The House’s tax cut is about half the size.

McCrory has yet to comment on the latest Senate bill. Even though it moves closer to the House position, Tillis said differences remain. “The House Republican Caucus will review the bill when it comes to our chamber, and we will continue to work with the Senate and the governor to address concerns that remain,” he said.

But Rep. Mike Hager, a top Tillis lieutenant, said the plan “looks pretty good.”

Only one Republican senator broke ranks to vote against the bill Tuesday. Sen. Bob Rucho of Charlotte led the tax overhaul effort earlier this year but resigned his post as Finance Committee chairman in a rare display of public disgust when his more far-reaching plan was rejected. He did not respond to a message seeking comment Tuesday.

The Senate will vote a final time on the legislation Wednesday.