Politics & Government

NC Senate rolls out sweeping economic development and tax bill

Chambers led by Senate leader Phil Berger (left) and House Speaker Tim Moore are nearing debate on a big budget item.
Chambers led by Senate leader Phil Berger (left) and House Speaker Tim Moore are nearing debate on a big budget item. cliddy@newsobserver.com

N.C. Senate Republicans have stuffed a House economic development bill with 46 pages of their own proposals – including lower personal income tax rates, a change in corporate taxes, a new formula for distributing sales tax revenues among counties, and a retooled jobs incentives program.

The Senate substitute for House Bill 117 – the “N.C. Competes” bill favored by Gov. Pat McCrory – looks far different than the proposal that passed the House in March with bipartisan support. But Senate leader Phil Berger said it represents a compromise between varying proposals for growing the state’s economy.

“I think there was a lot of give and take in putting this together,” Berger said during a rare appearance at the Senate Commerce Committee, where the new bill was rolled out. “A proposal such as this takes a great deal of compromises, a great deal of working together.”

The new bill drew immediate praise from the conservative group Americans for Prosperity, which said senators “demonstrated bold leadership today by maintaining this proven path to prosperity with a tax cut proposal.” But the liberal N.C. Justice Center criticized the plan, saying further tax cuts “will hinder the state’s progress” with “a strategy that has failed in many other states.”

Among the Senate bill’s provisions:

New sales tax on services: To help pay for new income tax cuts, the bill would broaden the sales tax base. Among the purchases that would face sales taxes: Advertising, veterinary and pet care services, and repairs and maintenance work on personal property such as cars. Large nonprofits, such as hospitals, would lose a sales tax exemption. Collectively, the changes would create $171.3 million each year in new revenue, senators said. A news release from Berger said additional sales tax would “continue the goal of moving away from unfair and burdensome taxes on property and income.”

Personal income tax cuts: The personal income tax rate would be cut from from 5.75 percent to 5.5 percent beginning in 2016. The standard deduction would increase gradually over a four-year period, meaning a married couple filing jointly wouldn’t owe income taxes on the first $18,500 of income by 2020. A single person wouldn’t owe taxes on his or her first $9,250 in income. “People will have more disposable income in their pockets,” said Sen. Bob Rucho, a Mecklenburg County Republican. “That is a great way to lower the tax burden on working families and small businesses.”

Corporate taxes: Over the course of three years, the state would begin using the “single sales factor” formula for calculating corporate taxes. It would calculate companies’ tax liability based entirely on sales – instead of also factoring in their payroll and property value. It’s effectively an additional corporate tax cut that favors companies with extensive property and payroll taxes in the state. “We are cutting what is an unfair second property tax in North Carolina,” said Sen. Bill Rabon, a Southport Republican.

Sales tax redistribution: The bill includes a new distribution formula for allocating sales tax revenues among counties – similar to a proposal floated by Senate Majority Leader Harry Brown months ago. The state would distribute 20 percent of revenues based on where sales occur, while 80 percent would be based on each county’s population. Brown said that’s a fair approach that offers a much-needed boost to poor counties, but larger counties such as Wake and Mecklenburg have complained that the change amounts to a significant budget cut because the current system keeps most revenue in the county where sales occur. The new version of the distribution plan allows counties to decide how they allocate revenue between city and town governments. “This one provision will transform North Carolina more than anything we’ll do this session,” Brown said.

Job incentives: The bill would cap the Job Development Investment Grant, or JDIG, incentives – the state’s main job incentive program – which has been out of money for months. The state could offer up to $15 million each year and up to $30 million during a year in which the state lands a “high-yield project” bringing thousands of jobs. Companies could receive higher payouts in poorer counties. And in the state’s wealthiest counties, including the Triangle and Mecklenburg County, local governments would be required to pitch in with incentives of their own.

‘I’m not shocked’

By changing a House bill instead of passing their own bill, Senate leaders likely will have a stronger negotiating position. Because HB 117 already has cleared the House, that chamber wouldn’t send the new version through its standard committee process, where changes can be made in public meetings.

Instead, House members can only approve the Senate version or vote it down, which would prompt a conference committee of legislators from both chambers to work out a compromise – often behind closed doors.

“It is typical, and I’m not shocked,” House Finance Chairman Jason Saine said of the Senate’s move. “Is there a better process? Probably.”

Saine, a Lincolnton Republican, said that because the Senate version lumps together economic development incentives with sweeping tax changes, a longer debate is likely.

“It extends this process versus something we could have been discussing all session,” he said. “It looks like we could probably be here (in session) longer because of that.”

Still, Saine said he’s confident the two chambers ultimately will make a deal. “From the House side, we intend not to play legislative games and put forth an economic development package,” he said. “I’m very optimistic that we will get to a place where we’ll find broad agreement and move forward.”

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The House version

The title is the same: “House Bill 117: N.C. Competes Act,” but the content is dramatically different after the Senate gutted the original version and added its own proposals.

When the House passed HB 117 in March, the centerpiece was an increase in funding for the JDIG incentives. House Republicans wanted to increase the cap from $22.5 million to $45 million for the current two-year period.

The original House version of the bill also included $20 million in funding for an infrastructure grant program that helps companies build new industrial sites. The House wanted to use the single sales factor for corporate taxes, but only apply the formula to companies investing $1 billion or more in what the state considers a high-poverty county.

The House bill also had a variety of industry-specific tax credit programs opposed by Senate Republicans. Those programs benefit airlines and technology data centers.

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