Senate leaders on Thursday rolled out the most comprehensive proposal to overhaul the states tax code, eliminating dozens of loopholes, but also shutting down popular tax breaks on food, mortgage interest payments and prescription drugs that would bring in more than $1 billion in revenue to help reduce overall tax rates.
The N.C. Fair Tax Act also taxes Social Security benefits for many retirees and extends the sales tax to more than 130 services, such as landscaping and legal help. While it closes many loopholes for businesses, it does continue some for certain sectors while bringing in roughly a billion dollars less in revenues over the next three years.
Gone, for example, is a loophole that lets purchasers of boats and jets pay no more than $1,500 in sales taxes. It costs the state roughly $10 million annually in lost revenue.
But the act also exempts those same boat and jet buyers from the local portion of the state sales tax because theyll also pay a local property tax. That would be a tax break of 2 percent on the purchase price until 2015, when the local share drops to 1.5 percent.
State Sen. Bob Rucho, a Mecklenburg County Republican and a chief tax writer, said if his plan becomes law, come Jan. 1, every single soul who pays taxes in North Carolina will have more money in their pockets.
Some of those who would take a hit disagreed.
At the states chapter of the AARP, director Doug Dickerson said the Senate plan hurts retirees in at least three ways. His membership relies on the exemptions for food, prescription drugs and Social Security income. The Senate GOP plan would repeal the first two and tax Social Security for those with other income sources.
These legislators are gambling with peoples lives, Dickerson said of Ruchos plan. I dont want to use expletives on the phone, but you can be very, very sure that our million-plus members in the state would know that Social Security would be taxed by this and would speak up quickly and loudly.
Rucho has been talking for months about revamping the tax code, and his plan is much more ambitious than two other tax bills also being considered in the General Assembly. A House bill being championed by Rep. David Lewis, a Dunn Republican and a chief tax writer, and another Senate bill, with sponsors from both parties, also seek to lower overall rates. But both are less aggressive on loopholes and do not create as big a revenue drop. The bipartisan bill is supposed to be revenue neutral. Neither of the competing bills touch food, prescription drugs or Social Security.
While all three bills have their critics, Ruchos bill faces the most opposition.
Rucho had talked of a plan that would eliminate most loopholes in favor of a general set of rules that leveled the playing field, and there is language that provides sales tax exemptions for business to business transactions, particularly for the many services that would have to start charging sales tax to their customers.
But much of Senate Bill 677 goes at the tax code in a piecemeal fashion. Farmers, for example, would keep their sales tax exemption on feed, only to lose it for pesticides, medications or litter. That change alone would bring in roughly $10 million in new sales tax revenues annually.
Other loopholes closed would require broadcast companies to pay sales on their towers and other equipment, newspapers to charge clients sales tax for advertising supplements, and air carriers to pay sales tax for repair parts and accessories.
In a news conference, Rucho and another chief tax writer, state Sen. Bill Rabon, a Southport Republican, said they sought to eliminate exemptions that were out of line with what other taxpayers get. They said they chopped out a sales tax exemption on farm building materials, for example, because farmers were already getting a capital expense tax break on structures.
The Senate plan cuts some of the most common tax breaks to help reduce overall tax rates. The sales tax exemption on food costs the state $622 million a year. The deduction on mortgage interest makes up a significant chunk of the $2.3 billion in standard or itemized deductions that taxpayers take each year. And the state loses $363 million a year by not taxing Social Security income. The plan would tax the benefits of retirees with incomes of more than $32,000 a year.
Rucho and Rabon said people affected by the loss of those tax breaks would still come out ahead because overall tax rates would be lowered.
Mark Zimmerman, a Chapel Hill realtor who leads the N.C. Association of Realtors legislative committee, said eliminating the mortgage deduction is not a fair way to go about tax reform. The House plan, which the realtors also oppose, caps the annual deduction at $25,000 worth of interest payments.
The biggest issue we have with the elimination of this deduction is it impacts the value of homes, he said. Currently, with the deduction, people can buy more home, which boosts the housing sector of the economy, and by eliminating it those valuations will come down.
The competing tax plans show wide disparities in a state government controlled by Republicans, and suggest a tough battle as lawmakers try to finish their business by early July.
Gov. Pat McCrory said in a statement he is opposed to key elements in the Senate plan, such as taxing food and medicine.
He said the other two bills are closest to my position.
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