Senate Tax Reform Plan Passes Key Committee Hurdle

Senate Republicans pushed ahead Wednesday with their version of tax reform as the chamber’s Finance Committee gave the bill a thumbs up. The measure was approved, however, without the support of the author of another key tax reform proposal.

Sen. Bob Rucho, R-Mecklenburg, who co-chairs the Senate Finance Committee, told his colleagues that he would not vote for the Senate’s version of House Bill 998.

In Rucho’s place, Senate President Pro Tem Phil Berger, R-Rockingham, appeared before the committee to urge support for the bill, which would reduce the personal income tax rate and phase out the corporate income tax.

The bill is likely to head to the Senate floor next week, and if it passes, a House-Senate conference committee will iron out any differences.

“We’ve been talking for years now about the need for tax reform,” Berger said. “When the Democrats controlled the General Assembly, they talked about the need for tax reform. When the campaigns were waged in 2010 and 2012, one of the issues that was talked about was tax reform.

“This bill will bring North Carolina into the 21st century in terms of our tax policy,” Berger said. “It will bring us to the point where the competition among states will be such that North Carolina will be in the forefront of states in the competition for jobs and in the competition for growth as the economy expands.”

A stark difference between the plan presented by Berger and one pushed by Rucho is that Berger’s bill does not expand the sales tax base to include most services.

Rucho said H.B. 998 is not the sweeping tax reform the state requires.

“Nibbling around the edges doesn’t work,” Rucho said. “We need a comprehensive tax reform package. … I cannot support this bill, and I will not vote for this bill.”

Senate Majority Leader Harry Brown, R-Onslow, urged lawmakers to look at what the plan backed by Berger and other Senate GOP leaders would do for the state in the long run.

“The status quo is not working in North Carolina; that is a fact,” Brown said. “It is time we move forward.”

Democrats on the committee also criticized the proposal.

“This bill really writes a blank check into the future,” said Sen. Josh Stein, D-Wake. He said that it would primarily benefit the state’s top tier of wage-earners.

Sen. Floyd McKissick, D-Durham, while agreeing “that tax reform is imperative and is necessary,” urged a slower approach allowing lawmakers ought to take more time piecing together a tax plan.

McKissick also noted the plan’s hit on state coffers, noting that it’s not revenue-neutral.

“It creates a $1.5 billion to $2 billion gap, shortfall, and that deeply concerns me,” McKissick said.

McKissick also said he was concerned about how the bill would affect some municipalities. He said some small towns would have to increase their property taxes to offset the impact of the bill.

The bill would eliminate some local revenues, such as local privilege taxes and local sales taxes on food. However, counties eventually would be able to reinstate their own local sales tax on food.

Another provision of the bill would eliminate all deductions on personal income taxes, except those required by the courts or federal law. That includes the home mortgage interest exemption on the state form.

Mark Zimmerman, legislative chairman for the N.C. Association of Realtors, said the elimination of that longtime provision concerns him.

“That policy has survived because it’s just been considered good government policy to support home ownership,” Zimmerman said.

Zimmerman said the association is much happier with the House tax plan, which maintains mortgage interest and property tax deductions, even though it caps them at $25,000.

He said that it’s a good thing to reduce income tax rates, but it would be “a step backward if we accomplish that by increasing the tax burden on the housing sector.”

The Senate plan won the endorsement of the N.C. Chamber.
“You can’t create more jobs if you don’t have the right tax climate,” said Lew Ebert, the chamber’s president. “The competition for jobs [with other states] has become fierce.”

The Senate plan would lower the personal income tax rate to 5.25 percent over two years. Currently, the rate is between 6 percent and 7.75 percent, depending on income. It also would create a zero tax bracket for the first $15,000 of income for married couples filing jointly.

It would phase out the corporate income tax by Jan. 1, 2017, and implement a flat business privilege tax on limited liability corporations and C corporations.

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