September 21, 2001

See a chart detailing each element in the tax package

House and Senate finally agree
on budget-balancing tax package,
clearing way for adjournment soon

By stitching together proposals from the House and Senate and throwing in a few loophole-closing ideas advanced by a blue-ribbon commission, the General Assembly finally came up with a tax package that raises enough money to balance the budget and has enough support to pass both chambers. The package, with will generate $1.05 billion in new revenue over the biennium, also was endorsed by Gov. Mike Easley.

In what amounts to blazing speed in the legislature, the tax package then was rolled into the $14.4 billion budget bill which had been sitting in a conference committee, and the overall package was adopted Thursday and Friday in both chambers, largely along party lines. The vote in the House was 62-55, with one Republican, Rep. Monroe Buchanan of Spruce Pine, who earlier was expelled from the GOP caucus for supporting the Democrats’ revenue plans, voting for the budget and tax plan Three other House members were absent. The vote in the Senate was 31-14, with three absent.

The budget was adopted on the 83rd day of the fiscal year. With that task accomplished, the General Assembly now will turn its attention to redistricting, an issue that largely has bubbled below the surface the past few months.

The compromise tax plan emerged Tuesday from the Senate Finance Committee, a day after Gov. Easley threatened to veto any budget based on the House tax package because he said it would lead to red ink in the budget’s second year. The Senate compromise, with higher revenue, satisfied the governor. Immediate attention then focused on how the plan would be viewed by the group of eight dissident Democrats in the House led by Rep. Dan Blue (D-Wake), the group whose opposition to new taxes on the middle class had so far denied Speaker Jim Black a working majority. When Blue made favorable comments about the compromise plan, observers knew a budget deal finally was at hand.

Most elements of the package have been seen in previous versions of House or Senate tax proposals. But some are new, such as a 6 percent sales tax on out-of-state long distance phone calls, an idea that will raise nearly $88 million a year when fully implemented. That and a 5 percent sales tax on satellite TV, which would generate about $23 million a year when fully implemented, are two ideas that came out of the Governor’s Loophole Closing Commission earlier this year but which had not been embraced by either the House or Senate tax panels. The tax package is detailed in the chart above.

The biggest piece of the package remains a half-cent increase in the sales tax, but there’s a twist. The plan calls for the state to collect the additional half-cent sales tax for two years, after which it would sunset. At that point, which would be in the 2003-04 fiscal year, local governments would have the option of picking up the half-cent sales tax and keeping the revenue for themselves. Also at that time, the state would stop reimbursing local governments $333.4 million annually for previously repealed taxes.

The other major money-raiser in the package is a temporary, two-year half-point increase in the state income tax rate on wealthy individuals. The compromise plan, as the House plan did before it, calls for a new 8.25 percent rate (up from 7.75 percent) on individuals with adjustable gross incomes over $120,000 and on couple with an AGI of more than $200,000. This will generate more than $100 million next year.

Easley’s campaign promise of a program called “More at Four” for pre-kindergarten children was salvaged, costing $6.4 million to start the program statewide. In addition, $25 million is allocated to hire more teachers and reduce the size of elementary school classes. State employees will get a $625 annual raise (equivalent to about 2 percent increase for the average state worker). Teachers will receive an average 2.86 salary boost, plus $100 toward classroom supplies. Mental health gets a boost with a new $47.5 million trust fund. The money will be used to refurbish existing mental health buildings and help transition patients from institutional to community treatment. 

"We are most grateful that the General Assembly has recognized the critical situation with our salaries," said Community College System President H. Martin Lancaster. "While there are some disappointments, including no additional money for Student Services, this is much better than we had expected," he added. The budget provides $6.9 million for community college faculty and professional staff salary increases, in addition to the general $625 salary increase per employee that all state employees will receive.