August 24, 2001

House ready to vote
on revenue package
based on NCCBI’s idea
for solving budget crisis
 
The House is scheduled to vote Monday night on a revenue bill that Speaker Jim Black unveiled this week whose core element is the proposal that NCCBI advanced in June for resolving the state’s fiscal crisis – a one-cent increase in the sales tax. That the bill is calendared for a floor vote indicates Black believes he has enough votes to pass it, which is a major breakthrough in the impasse that has handcuffed the chamber for weeks. However, Republicans in the House and Senate continue to oppose any increase in taxes, a stance that likely means the state’s long-running budget stalemate isn’t over yet.

Voting 18-13 along party lines, the House Finance Committee approved the tax package Thursday afternoon. The measure is entitled the Education Revenue Act, a name that invokes the cause many Democratic leaders have touted as their justification for raising taxes – that without additional revenue the legislature will have to slash state spending on public schools and higher education. Education consumes more than 60 percent of the state budget.

The tax package first popped up Monday when Black unveiled it during a press conference at the legislature. The Speaker’s package is a compromise between the revenue-raising proposal the House first considered late last month and the ideas that Gov. Mike Easley put forth in his televised address on the budget crisis last week. The package of tax cuts and hikes would generate $444 million in new revenue in the fiscal year that began July 1 and $663 million next fiscal year.

What’s important is that, for the first time, the governor and the House and Senate leadership are in agreement on at least the big-ticket part of the plan to end the state’s worst revenue crisis in a decade. And it’s the plan NCCBI out forward in June: A half-cent increase in the local option sales tax, in return for local governments surrendering claims to state reimbursement for previously-repealed taxes, and a half-cent increase in the statewide sales tax. Together, those small tax increases would raise nearly $800 million a year, nearly enough to balance the state budget, replenish the Rainy Day Fund and (hopefully) salvage the state’s treasured Triple A credit rating.

It should be noted that none of the penny increase in the sales tax would apply to food. The House’s new plan also incorporates another NCCBI proposal, that the half-cent statewide increase in the sales tax sunset in three years, levied from Dec. 1, 2001, to Nov. 30, 2004.

Under Black’s new proposal, local governments would get a half-cent increase in the local option sales tax in return for giving up $330 million in annual reimbursements from the state for previously-repealed taxes. In his TV address Easley was silent on whether he thinks the state should keep the entire penny increase in the sales tax or split it with local governments, but it’s believed he will go along with others in splitting it.

The tax package approved by House Finance includes a quarter-point hike – from 7.75 percent to 8 percent -- in the state income tax rate paid by high-income individuals. Previously, the House leadership proposed a full percentage point increase in the top income tax rate (see Aug. 3 Bulletin, page 4). The new tax rate would last from the 2001 tax year through the 2003 tax year. This higher tax bracket would impact 9,848 single filers, 52,471 married couples and 1,148 heads of households, according to the General Assembly staff.

The House plan calls for increasing the standard deduction for married couples from $5,000 to $6,000 – or exactly the same as two singles and thus eliminating the marriage penalty. As the governor proposed, the House plan proposes increasing the child tax credit from $60 to $100.

Saying he was very concerned about minimizing the impact of higher sales taxes on the working poor, Gov. Easley included in his package creation of a state earned income tax credit mirroring the federal earned income tax credit. Speaker Black also embraced a state earned income tax credit that would be available to a family of four earning less than $32,000 a year.

Gov. Easley also proposed a $750 million cut in state spending, but it was unclear whether he was including in that number the hundreds of millions in spending already trimmed by the House and Senate. “These targeted tax fairness measures, combined with the homestead exemption for seniors I recently signed into law, will protect family pocketbooks while putting the state’s financial house in order,” Easley said in his Aug. 16 TV address, which actually was taped two days earlier. “This is a balanced budget plan that will protect our schools and our working families. It asks for one penny in sales tax in exchange for triple-targeted tax relief.”

Read the complete text of Gov. Easley’s television address.

Speaker Black’s new proposal also includes two other items that were in the House’s previous tax package: subjecting liquor to the sales tax, imposing a one percent tax on HMOs and Blue Cross and Blue Shield of N.C., and eliminating the 3 percent sales tax cap on automobiles.
 
But House Minority Leader Leo Daughtry, the Smithfield Republican, rejected both the governor’s and Black’s proposals. “At a time when thousands are losing jobs across our state, and at a time when so many families are struggling just to make ends meet -- the last thing anyone needs is to pay more taxes,” he said during a taped response aired just after the governor’s televised message. “There is plenty of money if we spend it wisely,” added Daughtry, who said the simple answer to all the state’s revenue problems was to cut excessive spending. “Let's ask each agency head to reduce spending by just three percent. That would save us in the neighborhood of $450 million, enough to get us out of this current mess and on the road to financial solvency.”

Read the complete text of Rep. Daughtry’s remarks.

Democrats and education leaders immediately criticized Rep. Daughtry’s proposal for a three percent across-the-board cut in agency spending. The Department of Public Instruction released figures showing that such a move would cut another $176 million from the public schools and necessitate eliminating 4,300 teachers. "Our citizens have made it clear that they want better schools,” said state Superintendent of Public Instruction Mike Ward. “Legislators too have said that past low performance by North Carolina students was unacceptable. We took them seriously and have been continuously raising standards and improving schools. Money matters. If we reduce funds, it will hurt classrooms and cut at the heart of education progress," Ward added.

Read the text of the Department of Public Instruction’s response.

The Department of Community Colleges also blasted Daughtry’s proposal. President Martin Lancaster said the community colleges "could neither withstand nor absorb” such a cut in funding. "At a time when North Carolina's economy is suffering from the loss of jobs in textile and furniture manufacturing, a suppressed technology sector, and a decline in farming, the Community College System is the first line of recovery for those working adults losing jobs," he added. 

Lancaster noted preliminary registrations for the fall semester indicate that enrollments are at an all-time high, as the recent avalanche of layoffs and plant closings has sent displaced workers back to school. He said the dollar loss to the colleges would be about $18.5 million but emphasized the fact that the impact in human capital, faculty and instructional support staff would be far greater. 

Read the text of the community college response.

NCCBI said it supported Gov. Easley’s revenue package. In an Aug. 16 memo to the press corps, the association noted that it had previously endorsed a penny sales tax increase to help solve the state’s budget problems, “so we applaud the governor’s leadership in putting forward a solution which includes a sales tax increase, additional spending cuts and tax relief.”

NCCBI’s memo added that “our state’s Triple A bond rating is at stake, and it is imperative that action be taken to maintain this rating. In addition to the tax increase, we must look for ways to further reduce unnecessary spending and to increase efficiency in government.

”The sales tax with the relief for lower-income citizens is the fairest way to break the costly impasse in Raleigh,” the NCCBI memo continued. “A little sacrifice by all taxpayers will make sure we continue to invest in education and human services while maintaining our Triple A bond rating.”