An effort to cap the state income tax rate was removed quietly from the Senate’s calendar on Wednesday, one day after that body’s Finance Committee gave the proposed change to the N.C. Constitution a thumbs up.
Sen. Tom Apodaca, R-Henderson, made a motion to withdraw Senate Bill 817 from consideration and rescheduled it for a Saturday, June 25 vote. Without objection, the motion passed. The Senate typically does not meet on weekends, though it may schedule weekend sessions to allow the General Assembly to adjourn by the end of June, as some members have suggested is a priority.
The measure would have capped the state’s income tax rate at 5.5 percent. If approved by the General Assembly, voters would have had the chance to approve or reject the amendment in the Nov. 8 general election.
During the committee meeting, Sen. Bill Rabon, R-Brunswick, one of the bill’s sponsors, said that the changes in tax policy in recent years have succeeded.
“We’ve been able to lower the personal income tax rate and the corporate income tax rate and hopefully with this budget, we will raise the zero bracket,” Rabon said. Lawmakers also have expanded the sales tax base in recent years, he said.
“So far what we have done has worked,” Rabon said. “What this amendment will help us do will be to continue down the same path that we’re on and will continue to make North Carolina the leader in tax reform in the nation.”
Some Democrats on the committee, including Sen. Floyd McKissick of Durham County, questioned whether the proposed change would put lawmakers in a bind the next time there is a recession or the state is strapped for cash.
“Why would we want to put our financial handcuffs on when we don’t have to do so?” McKissick asked.
Rabon said he disagreed with the assertion that the move would handicap the state. He also said that the sales tax provides for a more reliable source of income.
“In the event you need money in a hurry, income tax is not the way to go because you have a one-year lag, at least” before higher rates would kick in, Rabon said. “However, sales taxes have [only] a 30-day lag.”
Rabon also said that lawmakers have shored up the state’s rainy day fund, leaving the state with a cushion in the event of another recession.
Sen. Joel Ford, D-Mecklenburg, questioned whether the state sales tax could be expanded much further. “We seem to have hit a wall with that base expansion as it relates to moving over into white-collar or professional services,” he said.
Lawmakers have expanded the sales tax to include some services, such as repair work, but have yet to to expand the tax to more professional services.
“I believe in the foreseeable future that more services will be added and that most of those services will probably be white collar,” Rabon responded.
Sen. Bob Rucho, R-Mecklenburg, said he agreed that white-collar services and blue-collar services should be treated the same.
Rucho also said that the constitutional cap would apply to both individual and corporate income tax rates.
The General Assembly has cut the income tax rate regularly since 2013. That year, the state had three income tax brackets ranging from 6 percent to 7.75 percent. Beginning in 2014, the tax reform package brought in a flat rate of 5.8 percent.
The current individual income tax rate in North Carolina is 5.75 percent. That rate is scheduled to fall to 5.499 percent in 2017.
The 2013 tax reform package incrementally cut the corporate income tax rate from 6.9 percent to 5 percent. Last year, lawmakers lowered the corporate rate to 4 percent for 2016.
The Department of State Treasurer opposes the bill, and provided a two-page document to committee members explaining its position.
The treasurer’s statement said the proposal potentially could have a negative effect on the state’s AAA bond rating, which could result in higher interest payments on bonds. It said the bill would increase the volatility and lessen the reliability of the state’s revenue stream. It also said that in five states — Florida, Maine, Nebraska, Oregon, and Washington — voters have rejected constitutional limits on taxing powers. Only one, Colorado, approved such a proposal. Voters there also approved a measure suspending the restriction for five years, the treasurer’s document said.
Rucho, who chaired Tuesday’s meeting, called the treasurer’s document “flawed.” Rabon said the treasurer’s office “cherry-picked” states, adding that Georgia has an income tax cap of 6 percent and is doing just fine.
To make it on the November ballot, the proposed constitutional amendment must pass both chambers of the General Assembly by a three-fifths majority of all members — a possibility reduced somewhat by Wednesday’s postponement of the Senate vote.