Stark differences in conservative Republican and liberal Democratic fiscal priorities were clearly on display during a Senate Finance Committee meeting Wednesday at which a $1 billion tax cut package was approved by voice vote.
Senate Bill 325 was then forwarded to the Senate Rules Committee, where it was passed Thursday morning, and now heads to the Senate floor.
“The proposed Senate tax plan represents a tax cut to 99 percent of all the individual income taxpayers in North Carolina,” Sen. Tommy Tucker, R-Union, a committee co-chairman, said in presenting the bill. “They will either receive a tax cut or pay zero income tax.”
The legislation would remove 94,000 people from state tax rolls, primarily affecting people whose income is between $20,000 and $50,000, Tucker said.
Among key highlights of the plan are a decrease in the personal income tax rate from 5.499 percent to 5.35 percent, and an increase in the standard deduction from $17,500 to $20,000 for married couples filing a joint return. The nonrefundable child tax credit, which is roughly $125, would be replaced with a child tax deduction ranging from $2,500 at the lower end of the income scale to $500 for higher income earners.
The bill trims corporate income tax rates, and implements a market-based sourcing tax scheme. Current law taxes North Carolina-based companies on all revenue generated. Market-based sourcing would tax income only from North Carolina customers. Advocates say it encourages employment growth and capital investment instead of penalizing it.
Differences in political party budget priorities surfaced immediately.
“Based upon the fiscal note here, it looks as if this has a substantial impact in terms of our budget in lost revenues,” said Sen. Floyd McKissick, D-Durham.
“First of all, it’s not lost revenues,” Tucker said. “It’s a tax reduction. You’ve got to have them before you lose them.”
Based on a fiscal note attached to the legislation, McKissick said, tax revenue reductions in successive years would be $323 million, $709 million, $774 million, $806 million, and $839 million.
“It does concern me that we really have significant needs as a state. Public schools are one of them. We have schools that are in deteriorating condition that we need to assist,” McKissick said. “I think it would be far better if we would fund that education.”
Improving broadband Internet service, road, bridge, water, and sewer infrastructure are vital needs.
“I just think we are selling ourselves short,” McKissick said.
Tucker was unmoved.
“I think that is the same rhetoric that we heard when we cut our first billion dollars,” Tucker said, referring to the elimination of a temporary sales tax Gov. Bev Perdue wanted to make permanent,.
This would be the fourth tax cut since Republicans took control of the legislature in 2010, Tucker said, and McKissick fails to recognize those cuts increased tax collections by stimulating economic activity.
“We were in the hole when we came in, in 2011, and we have held the line on spending, and we have decreased taxes. Thus it’s created a surplus. That is the business model,” Tucker said.
S.B. 325 continues that practice, he said.
Committee co-chairman Jerry Tillman, R-Randolph, told McKissick Republicans handle budget surpluses differently than Democrats. “We give it back to the taxpayers we took too much from. We put it in savings. And we spend it on programs.”
Democrats, Tillman said, spend it all.
“That’s why we got in this hole we got in, and we’re getting out of it now. And all of a sudden you and the governor want to spend these surplus funds. We’ve already heard you talk about it.”
Sen. Andrew Brock, R-Davie, a committee co-chairman, recalled a $1 billion budget surplus created from a federal tobacco buyout program when Democrats were in the majority. They “spent every dime of it, most of the money on recurring expenses when we knew it was only one-time money.”
Brock said the money doesn’t belong to lawmakers, but rather to taxpaying families and small businesses.
“They can use the money to help pay for some things for their kids, or maybe hire one extra employee. Maybe there’s not that ribbon for a politician to cut in front of that store, but for that business, and for that employer, that means a world of difference,” Brock said.
Sen. Gladys Robinson, D-Guilford, was concerned about reducing the corporate income tax from 3 percent to 2.75 percent next year, and 2.5 percent the year after.
“I’m sure the families will be glad to have a tax cut. What family wouldn’t? My concern here is as we continue to decrease the corporate tax, where are we going to end up? Facing cutting services or raising sales tax?” Robinson asked.
Sen. Jim Davis, R-Macon, defended the corporate tax cuts.
“It’s my understanding that corporations don’t pay taxes, they just embed the costs of those taxes into their goods and services,” Davis said. “So eventually the consumer is the one who pays those taxes, not the corporations.”
Sen. Andy Wells, R-Alexander, questioned the premise of sending taxpayers’ money to the government to redistribute.
“The question is, Can the General Assembly make better decisions about what these working families with low-incomes do with their money, or can those families make better decisions about what they can do with their money?” Wells said.
Sen. Joyce Waddell, D- Mecklenburg, questioned the Republican narrative about the tax cut package favoring middle-class taxpayers.
“The top 20 percent of income earners in North Carolina will receive nearly half of the tax cuts included in this proposal,” Waddell claimed.
Emma Turner of the legislative fiscal research staff said the percentage of those earning greater than $200,000 who would benefit isn’t 50 percent and is actually much lower.