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Budget
fireworks explode
as House accepts tax increases
More
battles loom over the state’s fragile finances
The
House took an important step toward closing a $167 million
hole that suddenly opened in the state budget by grudgingly
accepting higher corporate taxes. This week the chamber will
face even tougher votes on other revenue enhancements, a path
dictated when analysts convinced legislators that North
Carolina’s economy will grow by 4 percent next year, not 5.3
as the House and Senate spending plans assumed. The state’s
cherished Triple A bond rating hangs in the balance.
By a vote of 66-48, with six Republicans joining 60 Democrats,
the chamber on Thursday gave final approval to a bill targeted
at limited liability corporations, royalty payments and
subsidiary dividends. The three tax law changes, which will
generate about $61 million in new revenue next year, are among
the “loopholes” identified by a governor’s commission.
The six Republicans voting for the bill were Reps. Cary Allred
of Burlington, Charles Buchanan of Green Mountain, Gene
McCombs of Faith, David Miner of Cary, Richard Morgan of Eagle
Springs and Wilma Sherrill of Asheville.
The narrow
vote shows the House is somewhat willing to compromise with
the Senate on raising revenue to balance the new biennial
budget, which should have been in place two weeks ago. Just as
House and Senate conferees began meeting last week to hash out
a middle-ground plan, legislators heard from their own fiscal
analysts that the assumed revenue growth rate in both budget
plans on the table is too high.
The difference between 4 percent growth vs. 5.2 percent is
$167 million – a sum that must be cut from already
bare-bones budgets or raised through higher taxes. Most
observers agreed the House had to accept some if not all the
$180 million in tax increases or “loophole closings,” pick
your name for it, already included in the Senate plan.
The legislation prohibits companies from deducting royalty
payments as a business expense when payable to affiliated
companies. An out-of-state corporation earning profits from
stores in North Carolina, for example, now can pay little or
no state tax on the profits by diverting the royalties to a
subsidiary company as payment for use of the trade name. The
tax law changes also prevent a corporation from escaping
franchise tax on its assets by transferring them to an
affiliated LLC, which aren’t subject to franchise tax. The
third change makes North Carolina law on taxation of corporate
subsidiary dividends conform to federal tax law.
Testifying on the bill to the House Finance Committee, NCCBI
Vice President of Governmental Affairs Leslie Bevacqua said
that more than 90 percent of NCCBI’s members are satisfied
with changes made to the bill. “There were concerns when
these loopholes were introduced that the language was too
broad and would have unintended consequences for businesses,
but we have worked on narrowing the scope of these loopholes
and think this is a much better alternative than what was
presented initially …The three provisions in this bill by
and large have met with our approval.”
Getting the bill passed "was the easiest one" of
what are expected to be possibly two other tax increases
debated in the House, Speaker Jim Black said. Floor action is
expected next week on bills adopting part or all of NCCBI’s
bold proposal for a one-cent increase in sales taxes – half
for local governments and half for the state The debate is
expected to fall along partisan lines, with Republicans saying
the state has a spending problem, not a revenue problem;
Democrats saying can’t cut itself to recovery, and concerned
public and nonprofit groups like NCCBI, the League of
Municipalities and the N.C. Association of County
Commissioners worried about the state’s fiscal health and
credit rating.
The budget debate extended to the editorial pages, which are
giving NCCBI’s position extensive, although not entirely
positive, coverage. The N&O and others agree on the need
for new revenues through higher taxes, but the papers prefer
across-the-board income taxes hikes over a penny increase in
the sales tax. The Thursday Raleigh paper reprinted NCCBI’s
July 6 open letter to legislators and the governor advocating
the penny increase.
Gov. Mike
Easley called on lawmakers to raise taxes by $800 million over
two years, an amount he said is needed to keep the state on
sound financial footing. House Speaker Black signaled
some compromise was possible but indicated that he thinks
there isn't enough support among House members to bring up a
1-cent sales tax increase. He said the House may consider a
half-cent local-option sales tax, which would raise the
overall sales tax rate to 6.5 cents. If that passes, he might
run a bill for the other half-cent. See related story below.
House and Senate Republicans held a news conference Wednesday
to oppose any sales tax increase. "Democrats are trying
to further strangle a soft economy with tax increases,"
said House Minority Leader Leo Daughtry. Senate Minority
Leader Patrick Ballantine suggested the budget conferees
should cut spending even further rather than raise taxes.
The Senate Republican Caucus sent a letter to NCCBI responding
to the association’s position on a sales tax increase.
Signed by all 15 Republicans in the 50-member Senate, the
letter said NCCBI’s decision was a “huge
disappointment.” Read the
full text of that letter.
“You described a call for an $800 million tax increase as
courageous,” the letter said. “We suggest the real courage
would be to cut wasteful government spending. We do not have a
revenue problem, we have a spending problem.”
Gov. Mike Easley met with Republican legislators Wednesday to
show them a letter State Treasurer Richard Moore got from
Moody’s which contains the ominous news that “we have
concerns as to whether North Carolina continues to meet the
standards of a Triple A-rated state.”
Moody’s also said it “has concerns that reductions in the
level of state reserves, decline in the state’s audited GAAP
yearend fund balances, and the slowness to restore long-term
structural budget balance after a series of adverse financial
events have established a negative state credit trend.” Read
the full text of that letter.
The governor, who earlier in the week conferred with Speaker
Black and Senate leader Marc Basnight, urged lawmakers to
consider a broader tax increase, but he wouldn’t say which
ones he prefers. Easley has indirectly endorsed NCCBI’s
position. "The 90 minute meeting was very cordial and
constructive," Easley said after his meeting with the GOP
legislators. "I asked them to join me in my efforts to
find solutions to the problems that we are facing, and I
sought their cooperation in giving my administration the
flexibility to find necessary savings to trim state government
without making cuts to the classroom. In the past five months,
we have been able to cut nearly $500 million through efficient
management of our agencies."
"During the meeting, I solicited their thoughts for new
revenue to protect the fiscal integrity of the state without
making devastating cuts to education," said Easley.
"I look forward to hearing their ideas."
Both the House and Senate budgets propose spending roughly
$600 million more money in the 2001-02 year than the state
spent last year, a fact GOP leaders point to as evidence that
spending can still be trimmed. Higher Medicaid costs accounts
for much of the new spending, as does new spending for
Easley's proposals for lowering class size, a pre-kindergarten
program for at-risk 4-year-olds and a prescription drug plan
for seniors. In addition, enrollment increases in education at
all levels and the state employees health plan account for
most of the remainder of increased spending.
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