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Senate Adds New Tax Cut To Fiscal Equation

Rucho plan would cut income tax rates, expand standard deduction

Senate leaders punctuated a week of tax policy talk by introducing a $1 billion tax cut of their own.

Earlier in the week, Senate Majority Leader Harry Brown, R-Onslow, introduced a bill changing the way local sales tax revenues would be disbursed, a move favoring rural counties over urban areas. Meanwhile, the House overwhelmingly approved a bill restoring some of the historic development tax credits that were eliminated two years ago in a tax reform package. And leaders in both chambers announced an agreement rewriting the gas tax law.

On Thursday, Sens. Bob Rucho, R-Mecklenburg, Bill Rabon, R-Brunswick, and Jerry Tillman, R-Randolph, introduced a bill that would cut the personal income tax rate over two years from 5.75 percent to 5.5 percent. It also would cut the corporate income tax rate from 5 percent to 4 percent over the same time period.

“What we’re trying to do is continue down the path of comprehensive tax reform,” Rucho said on the Senate floor following Thursday’s session.

Rucho noted that the bill creates a “zero bracket,” assessing no state income tax on the first $20,000 earned by married taxpayers filing jointly. Single taxpayers would pay no income tax on the first $10,000 of their income.

“That’s a big, important issue that we’re trying to fix this time … helping out working families, the middle class, and small businesses,” Rucho said.

Donald Bryson, state director of Americans for Prosperity-North Carolina, said he was encouraged that Senate leaders are trying to deliver tax relief to workers and job creators.

“I think they are getting to the root of the problem with economic development,” Bryson said. “Taxing income is a problem and actually slows economic growth.”

However, Bryson stopped short of giving the plan AFP’s stamp of approval.

Roy Cordato, vice president for research and resident scholar at the John Locke Foundation, questioned the wisdom of proposing tax cuts at this time.

“The point is to protect the tax cuts that we got and the reform that took place in 2013, and with an eye toward more tax cuts down the road,” Cordato said. “It’s not a matter of whether I like tax cuts, but timing.”

Cordato said that instead of cutting tax rates now, surplus revenues should be directed to the state’s rainy day fund.

Currently, the state has $652 million in its rainy day reserve fund, amounting to 3.2 percent of the state’s General Fund. The state requires local governments to keep 8 percent of their annual budgets in reserves.

“I don’t think now is the time for additional tax cuts because the rainy day fund is underfunded,” Cordato said. “It is likely that there will be a recession in the next couple of years. If that happens, there will be shortfalls in revenues as there have been for the last several years since the 2008 recession. It’s important that there’s enough revenue to cover those shortfalls. All the pressure in a recession will be to increase taxes to cover deficits.”

“This is a tax savings to people,” Rabon said. “A married couple with $46,000 a year in income, which is pretty average in the state of North Carolina, this is going to mean about a $350 tax savings for them every year.”

Rucho said the tax savings for North Carolinians would produce “dynamic growth” in state revenues.

“If you take a billion dollars off the table that government has been spending and — it’s your money — spend it, you’re going to create jobs, you’re going to consume more and spend more,” Tillman said. “The economy is going to grow. … We’ll put it back in the people’s pocket who sent it to the government to start with.”

Tillman said he expects to see a budget surplus this year. “That means these tax policies are working,” he said.

Earlier in the week, Brown introduced a bill that would change the way that the 2 percent local sales tax is distributed. Currently, 75 percent of the revenues from the local sales tax go to the county where the taxes are collected, with the remaining 25 percent distributed on a per capita basis.

Brown’s bill would distribute all local sales tax revenues per capita. He said the transition would be phased in over three years, giving counties and cities time to adjust to any expected losses in revenues.

A map distributed at Brown’s Monday press conference reallocating sales taxes by Brown’s formula shows 13 primarily smaller, rural counties at least doubling their projected revenues compared to actual 2013-14 fiscal year collections. It shows eight urban and coastal counties losing revenues.

Over the three-year transition period the map factors in 3.5 percent annual growth, which Brown called a “conservative” estimate. But the map also did not estimate the revenues counties would collect if revenue grew annually by 3.5 percent and the current allocation formula were left in place. This set up an apples-to-oranges comparison.

Brown said that while the map did not include comparable growth under the current allocation formula, the three-year phase-in would provide some larger urban counties an opportunity to cushion the blow. Brown said many of those urban counties are gaining in population, so they could be “winners” under his formula.

Sen. Floyd McKissick, D-Durham, noted that the 2013-14 figurers were “a static number,” adding, “The numbers can be used to support whatever set of assumptions you want to work from.”

McKissick said he thinks Brown is open to compromise and understands the difficulty many rural counties face providing schools and infrastructure.

“Can you somehow help out the rural counties without hurting the urban counties?” McKissick asked.

Brown’s bill also changes the local sales tax to a state sales tax, requiring distributions among counties and municipalities to be allocated per capita. Currently, local county commissioners have the option of distributing the local sales tax either per capita or based on property valuations.

“Because the legislation would change both the distribution formula statewide, but also mandate per capita distribution within counties, no longer allowing distributions on an ad valorem [property value] basis, the legislation creates a lot of unknown effects on counties and cities,” said Scott Mooneyham, a spokesman for the N.C. League of Municipalities.

In Carteret County, municipalities including Atlantic Beach, Emerald Isle, and Pine Knoll Shores would see less revenue under a per capita distribution system than they would under a system basked on property valuation. However Beaufort, Morehead City, and Newport in the same county would benefit by having a per capita distribution system.

“By creating so many moving parts, the League of Municipalities is deeply concerned that this legislation would shift this from a local tax to a state tax,” Mooneyham said. “The League of Municipalities fears that in doing so, this revenue could be subject to the whims of future legislatures.”

Barry Smith (@Barry_Smith) is an associate editor of Carolina Journal.