Senate has its tax counteroffer in place

Jul. 01, 2013 @ 08:20 PM

RALEIGH — Senate Republicans tried to build momentum for a North Carolina tax overhaul Monday by rolling out a counteroffer for the House that would reduce personal income tax rates, eliminate the corporate income tax and subject more transactions to sales taxes.

Senate leader Phil Berger, R-Rockingham, unveiled it in committee. He said the bulk of it was presented to House Republican leaders last week but didn't lead to a deal.

After negotiating privately for two weeks with House counterparts and receiving input from Gov. Pat McCrory, Berger said it was time to take the traditional approach of passing a bill and sending it to the House, which passed its own version four weeks ago. He said he doesn't know how House Republicans or McCrory will respond.

"We think we've reached the point where continued discussions are probably not going to modify things that much if it all and that the Senate needs to move forward with a tax plan," Berger said after the new proposal was approved by the Senate Finance Committee. "This is a substantial movement toward the House position, and it's something we're hopeful the House will act positively on."

Berger said his updated proposal withdraws provisions that House Republicans previously balked at in an earlier Senate version. It was debated and voted on in mid-June but ultimately returned to the Senate finance panel.

The Senate proposal no longer would subject some Social Security benefits to personal income taxes or eliminate standard and itemized deductions and personal exemptions. The Senate plan also moved toward the House position by giving tax filers unlimited deductions for charitable contributions and partial deductions for mortgage interest and property taxes.

Monday's bill also no longer eliminates the 2 percent local sales tax on groceries. Business privilege taxes would be lowered over time, rather than phased out for now.

The Senate plan would still eliminate over time the corporate income tax rate that's currently at 6.9 percent but now it would take one year longer to repeal it until 2018. The House only wants to reduce the corporate rate to 5.4 percent over five years.

The three individual income tax rates currently in place — the highest is 7.75 percent — would be reduced in both plans to one. The House wants a 5.9 percent flat rate, compared to the Senate's 5.75 percent rate.

Berger told colleagues the Senate's version would still simplify the state's tax code, "provide substantial tax relief to working families and (continue) to make our state a more attractive place for businesses to locate, to grow and to operate." North Carolina's current income tax rates are the highest in the Southeast.

Berger's latest proposal is less pricey to state government than the Senate's earlier version but still more expensive than the House version. Fiscal analysts at the General Assembly project the plan would mean roughly $3.3 billion in less revenue for the state through 2018, including $660 million over the next two years. The House plan would scale back revenues by $1.8 billion over five years, and $356 million through mid-2015.

The loss of revenue is important as negotiators already late on a final state government budget need to know how much money they should be plan to spend. McCrory has said he wants to lower income tax rates but is concerned whether there would be enough money to carry out some of his priorities.

A spokesman for House Speaker Thom Tillis, R-Mecklenburg, didn't immediately respond to the Senate's proposal. Berger said he, McCrory and Tillis met at the old Capitol building late Monday afternoon for an hour to discuss taxes, the budget and other items.

Sen. Josh Stein, D-Wake, voted against the new tax proposal because he said too many of the tax cuts would benefit the richest North Carolina residents.

"We need to make sure we have enough for essential services and not a dollar more but this isn't the time to be doing tax cuts down the road for the wealthy when we have a lot of critical needs," Stein said.

The Senate GOP proposal would still cap the sales taxes that nonprofit groups and hospitals can be refunded annually, with the amount falling over time. But the cap levels are higher than before. The House kept refunds unlimited. The North Carolina Hospital Association remains opposed to the higher cap because it would cause financial distress and open the door to repeal the exemption later, group lobbyist Hugh Tilson said.