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NC tax bill closes some loopholes while preserving and extending many others

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RALEIGH Chiropractors are losing a sales tax break that may increase the cost of vitamins and other nutritional supplements for their patients. Newspapers would have to charge sales tax to subscribers or those who buy from vending machines. And sales tax holidays for school supplies and energy-efficient appliances would disappear.

But still on the books is a $1,500 cap on the sales tax for a yacht or a jet, a provision that costs the state $10 million a year in lost revenue. Beer, liquor and tobacco distributors would keep their rebates worth a combined $12 million annually for collecting taxes from their customers on behalf of the state. Country clubs and other recreational nonprofits keep their exemption from the corporate income tax, a tax break worth a combined $600,000 a year.

The monthslong debate over overhauling the state tax system has produced a mixed bag of loophole closures, creating winners and losers in a bill that Republicans declared would create a level playing field. A basic principle of tax reform is to make the tax code fair for everyone while raising just enough revenue to pay for government services.

Under the legislation sent Thursday to Gov. Pat McCrory, who is expected to sign it, some taxpayers would see relief in the form of lower income tax rates and higher standard deductions. But the bill only cuts 48 of the more than 300 tax breaks on the books, and lawmakers are banking on strong economic growth in subsequent years to make up for hundreds of millions of dollars in revenue losses from cutting income taxes.

One of the tax package’s authors, Rep. David Lewis, a Dunn Republican, said it represents significant progress.

“To do away with 48 special tax provisions is simplification, and when some of this stuff sunsets (in the future), the number will be over 60,” he said.

Earlier this year, The Observer published a three-part series, “The Missing Money,” on tax loopholes, finding that lawmakers and governors in recent decades have done a poor job of tracking the growing numbers of tax breaks and their ballooning costs. The most recent report by the state Department of Revenue said there were 318 tax breaks worth a combined $9.2 billion, which is equal to nearly half the annual $20 billion state budget. The revenue loss from new and existing loopholes had climbed by $1 billion in just four years.

The Senate moved a plan earlier this session that closed many loopholes, but it ran into fierce opposition from a housing industry that wanted to protect mortgage interest deductions, retirees who wanted to keep Social Security tax-exempt and nonprofits that wanted to preserve a sales refund. The House’s plan was much more modest and drew a more favorable response from McCrory. The governor initially was concerned that the package dramatically reduced revenues, so the legislation is now tied to economic growth targets to help prevent future budget holes.

Senate leader Phil Berger, an Eden Republican, said the loopholes closed represent “the ones we could reach agreement with the House on.”

The result is more tax cutting than closing loopholes.

‘Piecemeal’ approach criticized

Some loopholes, such as sales tax breaks on fuel for US Airways and automotive parts and jet fuel for auto-racing teams, get a two-year extension. Lewis said those industries are important to the state, so the extensions give lawmakers more time to assess their impact on jobs.

Alexandra Forter Sirota, director of the N.C. Budget & Tax Center, which advocates for people with lower incomes, said the tax plan closes some loopholes that needed elimination, such as a break on the payment of income taxes on the first $50,000 of business income.

She and others have said that break, passed in 2011, was ill-defined and open to large businesses, such as the partners of major law firms who didn’t need it. That tax break would cost the state $395 million in the 2014-15 fiscal year if it is not eliminated.

She agreed that business-to-business transactions such as farmers who buy seeds to grow crops, should be protected from the sales tax, which the legislation continues to allow.

But she said the package could have done more to close loopholes that favor the wealthy or those who have long had political clout in the General Assembly.

“Where there were opportunities to identify (tax breaks) that weren’t delivering on their promises, they really didn’t pursue those,” she said. “And I think in part the idea all along has been to pursue massive income tax cuts and either pay for them with sales tax expansion, or, quite frankly, as we’ve seen, not pay for the cuts at all but let them be paid with cuts to public schools and other programs.”

Democratic Rep. Paul Luebke, a Durham Democrat, said the Republicans’ “piecemeal” approach leaves questions about which special provisions were protected and why. “I felt the explanation was lacking,” he said.

Some breaks to get second look

The list of closed tax breaks provided by legislative staff spreads the pain around somewhat. Job creation credits that a UNC-Chapel Hill study did not find to be effective would be cut. Retirees’ income from private plans or government pensions would now be subject to the income tax, save for a group of retirees and vested employees whose pensions are protected by a roughly 20-year-old court settlement known as the Bailey case. The retirement income break costs the state about $89 million annually.

Those who buy more expensive homes would only be able to write off part of their mortgage interest expenses and local property taxes on their state income taxes, a significant defeat for the powerful realtor and homebuilder lobbies. Any combination of property taxes and interest expenses that exceeds $20,000 won’t be eligible for a deduction.

Roughly half of the tax loopholes that would be closed have little effect on state revenues, such as an income tax break on money paid out of a relief fund following Hurricane Floyd, which hit in 1999.

“We eliminated those that were perhaps the least used or benefited the fewest number of taxpayers. A lot of them had been on the books for decades and really had served their purpose,” Lewis said.

Popular exemptions such as the sales tax breaks on food and medicine and the income tax exemption for Social Security checks were protected, he emphasized.

Lewis said loopholes not taken up in this legislation would get more scrutiny in a study committee. Several are identified for the study, such as the $80, or 1 percent cap, whichever is greater, on a privilege tax businesses pay for machinery and other equipment.

Not among them, however, is the $1,500 cap on the sales tax for boats and planes, which advocates have said helps keep the state’s boat building industry alive. Lewis said it should get a look, too.

“We are seven days from the end of session,” he said. “I think issues like that need to be addressed. That one we just didn’t get to.”

Kane: 919-829-4861
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