RALEIGH State Senate Republicans on Thursday gave their stamp of approval to a tax reform plan built on the premise that what’s good for business is good for North Carolina.
The legislation follows a prescription promoted by national conservative tax reformers: imposing a flat income tax rate, phasing out corporate income and business franchise taxes, repealing the estate tax and closing loopholes.
Critics on the left, including Senate Democrats, say the package gives large, out-of-state corporations all the breaks and shifts the tax burden onto the middle class. Critics on the right – including Mecklenburg County Republican Sen. Bob Rucho – broke ranks with Senate leadership and said it didn’t go far enough and failed to get rid of unfair tax breaks.
Earlier in the day, Rucho resigned in protest as co-chairman of the Senate Finance Committee, citing the “fundamental disagreement” between the plan and his own proposal. Rucho also took a swipe at House Speaker Thom Tillis and Gov. Pat McCrory for not having “the political backbone to fight the special-interest groups.”
Rucho’s frustration may turn out to be only symbolic, as Senate President Pro Tem Phil Berger said he would not accept the resignation.
But the outcome of Thursday’s vote was never in doubt after a 2 ½-hour discussion on the Senate floor, where Berger personally steered the bill to victory. The approval on second reading came in a 30-17 vote, which saw Rucho and Sen. Tommy Tucker, a Union County Republican, side with Democrats. Final approval is expected on Tuesday.
The vote capped a week in which Berger abandoned Rucho’s own tax bill to come up with one that didn’t expand sales taxes on services, didn’t tax prescription drugs and eliminated not only Rucho’s proposed state tax on food but current local food taxes as well.
His gambit now returns to the House, where it will have to be reconciled with that chamber’s version of tax reform.
Berger touts free enterprise
Berger said Thursday’s action was a major step forward in a legislature that hasn’t before been able to muster a comprehensive tax update.
“Economists we talk to will tell you reducing tax obligations on corporations makes those corporations more competitive,” Berger said. “If we believe the free enterprise system is the best system available to us, and that jobs are created in the private sector, this will help jumpstart the private sector economy. ”
He noted the independent, pro-business Tax Foundation in Washington, D.C. estimates the plan would move North Carolina from 44th in business tax climate to sixth. “That will translate into jobs for the people of North Carolina,” he said.
But Democrats said it isn’t comprehensive tax reform at all, but a piecemeal shifting of the tax burden to benefit a few. Sen. Josh Stein of Raleigh said moving up the Tax Foundation’s index according to how low taxes are is not good public policy.
Stein said if Berger’s bill became law it would come with a price tag: not enough money for education, roads, public safety and health care.
By the 2017-18 fiscal year, personal income and corporate tax cuts would total $2.3 billion a year under the Berger plan, according to analysis from legislative staff. Over that same three-year period, state government would have $1.3 billion less in revenue and local governments would have $177 million less in their coffers
“It’s a tax cut for the wealthiest among us, and large, profitable out of state corporations paid for on the back of the average taxpayer here in North Carolina,” Stein said.
Much of the debate focused on whether it truly is a tax shift that harms the middle-class, as well as cities and counties. Democrats said municipalities will have to raise property taxes to make up for the lost revenue.
Democratic freshman Sen. Gene McLaurin, a former mayor of Rockingham, said estimates are that local governments in his district would have to make up for losses ranging from 4 percent to more than 30 percent. The bill would take away local governments’ ability to tax food on Nov. 1, 2014, although it would permit counties to impose that tax again in January 2015.
Berger said those on Social Security would not be affected. The plan would conform to federal law, but retirees would pay less than they do currently or pay nothing in state income tax under 10 different scenarios posed by the AARP and analyzed by the legislature’s fiscal research staff.
For example, he said, a single person earning $18,000 in Social Security and $15,000 in a pension would pay less. Married couples filing jointly with $32,000 in Social Security and $15,000 in pension would pay zero instead of the $120 they pay now, he said. Retirees would also benefit from tax-free food, he said.
Someone whose only source of income was Social Security would pay no taxes on it.
Another concern Democrats raised on the Senate floor was the bill’s tax hike for manufactured and modular homes, citing it as an example of how smaller businesses would suffer. The sales tax rate on manufactured homes would increase from 2 percent with a $300 cap to 4.75 percent without a cap, and for modular homes from 2.5 percent to 4.75 percent.
Sen. Harry Brown, a Republican from Jacksonville, said the bill wasn’t perfect and was only a first step toward further tax reforms. But, he said, it was time to do something besides pick apart all the hard work that the bill’s authors have put into it.
“If we don’t pass something, it’ll be 10 years before we try again,” he said.
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