Senate Republicans rebuffed a pair of last-ditch Democratic amendments on Tuesday, and approved by a 31-18 vote House Bill 3, containing three amendments to the state constitution including a single amendment combining two measures — one permanently lowering the cap on the state personal income tax rate from 10 percent to 5.5 percent and the other creating an Emergency Savings Reserve Fund as a budget buffer during economic downturns.
The measure now goes to the House, where it faces an uncertain reception because of add-ons in the Senate. The original House bill dealt only with eminent domain, restricting taking of private property to a government use. The Senate also tacked on a constitutional amendment preserving the right to hunt and fish.
If approved by two-thirds of the full membership of the House — getting at least 72 votes — the amendments would be put on a referendum for voters to decide in the Nov. 8 general election.
Debate on Tuesday was brief and restrained when Sen. Ben Clark, D-Cumberland, offered an amendment to reduce the income tax rate to 7.5 percent, and annually index the standard deduction, and Minority Leader Dan Blue, D-Wake, presented an amendment keeping the 5.5 percent tax rate, and indexing the standard deduction, sometimes called the zero tax bracket.
But on Monday, impassioned senators tossed barbs on the Senate floor before majority Republicans passed the bill on second reading in a 32-17 vote.
Constitutionally capping the income tax rate at 5.5 percent sparked the fiercest debate.
“I think it’s the smart thing to do, and I think it shows that North Carolina is trying to work in the 21st century,” said Sen. Bill Rabon, R-Brunswick.
Sen. Brent Jackson, R-Sampson, said creating the Emergency Savings Reserve Fund would require the General Assembly annually to deposit 2 percent of appropriated general funds excluding capital and operating expenses into the new account — about $400 million a year — until the fund balance meets 12.5 percent of the previous year’s appropriated funds.
A two-thirds supermajority vote by the General Assembly would be required to spend the funds or not allocate the fixed amount, or for the governor to tap into the fund, “even in declared emergencies,” Jackson said.
Sen. Jay Chaudhuri, D-Wake, who spent more than six years as general counsel in the state Office of the Treasurer, said North Carolina is one of only 10 states with a AAA bond rating from all three national credit rating agencies.
By barring the state from using personal income tax rate hikes to increase revenues, the constitutional amendment would have a negative effect on a credit rating agency’s assessment of the state, Chaudhuri said.
Georgia was criticized by credit rating agency Moody’s for capping its income tax in the state constitution, he said.
“If we were to believe the rhetoric we just heard, we would raise taxes immediately” to strengthen the state’s bond rating, said Sen. Jerry Tillman, R-Randolph. “Democrats probably won’t like this bill because it restrains your spending.”
Sen. Michael Lee, R-New Hanover, said he, too, initially was anxious about the constitutional amendment’s impact on the state’s bond rating. But he learned that Georgia retained its AAA bond rating despite its constitutional cap, and credit rating agency Fitch said it was not a detriment to Georgia’s ability to raise funds.
Sen. Bob Rucho, R-Mecklenburg, told Chaudhuri personal income is rising in North Carolina compared to the rest of the nation, and the state is seeing surpluses rather than $2 billion deficits “which your party was definitely responsible for. We’ve seen growth in GDP. We’ve seen growth in jobs. We’re on the right path, and this is another step in that direction.”
Sen. Ralph Hise, R-Mitchell, took aim at Chaudhuri’s emphasis on bending to credit rating agencies dictating state financial management.
“It’s time to take a new vision for the state of North Carolina,” Hise said. “Let us become a state that removes itself from the bondage of debt. Let us be a state that pays forward for our roads, and transportation, and schools, and not looking for some organization to evaluate us on how well we can borrow funds. Let us put limitations on this body” rather than raising taxes and harming the economy.
Sen. Floyd McKissick, D-Durham, said the problem with talking about vision is “none of us have the capacity to know the future.” He used the budget building process in 2008 as an example.
“Little did they know when they passed the budget that year that come September there would be a collapse of our economy,” and in 12 months there would be a $3 billion shortfall in the state budget, McKissick said. The state made modest increases in sales and income taxes to offset the deficit, he said, but the constitutional amendment prevents such a “balanced portfolio.”
“Why would we ever want to put shackles and chains upon the capacity of future General Assemblies to do what is wise and necessary based upon the conditions that they will experience?” McKissick said. “This is serious business,” and shouldn’t be used as an election year ploy to get votes.
That prompted Sen. Andrew Brock, R-Davie, to retort that he was in the Senate when Democrats raised taxes, but refused to cut from the budget thousands of unfilled positions.
“Ghost employees. Ghost departments,” Brock said. “North Carolina put Enron to shame with how they spent money, and it [put] handcuffs on the economy, on small businesses trying to make it during that recession.
Jackson said North Carolina is one of only a few states that does not outline eminent domain powers in its constitution. The amendment is intended to prevent a situation like that in Kelo, Conn., in which the Supreme Court ruled government could seize private property and give it to another private property owner to enhance economic development.
The amendment also requires a jury to set the compensation amount when eminent domain is used to take private property for a public use.
Sen. Buck Newton, R-Wilson, a self-described “avid outdoorsman,” presented the hunting and fishing amendment.
“I think this is imperative that we do this to save for posterity, for future generations, this tradition,” he said.
Editor’s note: This story and the headline were edited after initial publication to reflect that H.B. 3 included three rather than four constitutional amendments.