Check from Uncle Sam helps restart
stalled efforts at budget compromise

A check for $510 million from Uncle Sam jumpstarted faltering budget negotiations this week but the Senate gave the cold shoulder to a House plan for using the windfall to solve the state’s latest revenue problems. The $510 million is coming to North Carolina as its share of the $20 billion in federal aid to states included in the massive tax cut bill recently approved by Congress. The House plan that popped up Wednesday would use $310 million of the $510 million to help close a revenue gap that has developed in the final quarter of the current year. The House would use the remainder of the D.C. dollars, plus money from additional spending cuts proposed in the Fiscal 2003-04 budget, to cover a projected revenue gap in next year’s budget. A slowdown in tax revenue since April is throwing this year’s budget $456 million out of balance and means revenue growth projections for next year must be scaled back.

The basic problem dividing the budget conferees is that the House opposes any further tax increases and the Senate opposes any additional budget cuts. The $510 million from Uncle Sam isn’t enough to bridge the gap. The House’s revised $14.8 billion budget for the year beginning July 1 is $144 million less than the plan the chamber passed in April. It proposes $200 million in Medicaid cuts, $20 million in across the board cuts and a reduction of $70 million in appropriations to the Clean Water Management Trust Fund. The new bottom line in the House budget is $264 million less than the plan the Senate passed.

Next week, the Senate conferees will be watched to see if they can come up with a way to use the federal windfall to close the budget gap between the chambers.

House and Senate leaders are working toward trying to get the budget adopted by June 15. One issue that is pushing them towards this date is the half-cent sales tax. Both the House and Senate budget proposals are based on extending the half-cent sales tax, which is scheduled to sunset on June 30, for an additional two years. If the budget is not adopted by July 1, the half-cent sales tax will expire. At the end of the House session on Thursday, Speaker Jim Black told House members that they needed to begin winding down committee meetings in anticipation that they will complete their work and adjourn by the end of June.

Project development financing clears Senate
The Senate gave third-reading approval Thursday to legislation that would allow local governments to issue bonds without voter approval to help finance some publicly owned projects that also benefit private development. The measure, S 0725 (Clodfelter) Local Option Project Development Financing, passed by a final vote of 43-2. NCCBI, local chambers of commerce, economic developers and most local governments support the concept, which would help cities and counties build parking decks, convention centers or other similar structures that are part of larger economic development projects. Local governments would use future tax property revenues generated by the projects to pay off the bonds. The measure would require a change in the state constitution. The bill now goes to the House for consideration.

Legislature acts to protect state workers during smallpox vaccination
The Senate unanimously agreed Wednesday that state workers should be covered by their health insurance plan and workers compensation if they suffer an adverse reaction to the smallpox vaccine. The measure, H 0273 (Glazier) Adverse Reactions to Smallpox Vaccination, not returns to the House for concurrence in amendments. Under the bill, the state would pick up any additional health care costs not covered by a federal compensation program signed into law last month, including full pay for three months and $500,000 to family members of state employees.

Left-on-red bill sputters in the Senate
The Senate Judiciary II Committee on Thursday rejected legislation that would let motorists turn left at some red lights. The judiciary panel voted 5-6 against H. 147 Left Turn on Red, which would apply only to intersections where drivers turn left from a one-way street onto another one-way street. Organizations for the blind and disabled opposed the measure. Forty-two states allow left turns at right lights.

Restaurants get a break on alcohol sales
The Senate gave third-reading approval Wednesday to legislation that would lower the minimum percentage of food that restaurants must sell to keep an ABC permit from 40 percent to 30 percent. After the 33-16 vote for the House-passed H. 900 (Gibson) Restaurant ABC Permits, now goes to Gov. Mike Easley for his signature.

Senate acts to thwart identity theft
The Senate voted unanimously on Thursday to adopt legislation intended to protect shoppers from identify theft by outlawing the practice by most businesses of printing the customer's credit card number or card expiration date on a sales receipt. H. 357 (Barnhart) No Credit Card Number on Receipts stipulates that cash registers may not print a receipt showing more than five credit card digits, starting July 1, 2005. New cash registers put into use starting next March 1 would have to meet the requirement immediately. A person who violates the ban would have to pay up to $500 per incident, but the total penalties couldn't exceed $500 in a month or $2,000 in a year. The ban wouldn't apply to people who record credit or debit card transactions only by hand or through an imprint or copy of the card. The bill now goes back to the House for concurrence in amendments.

Senate agrees to drop teacher portfolios
The Senate voted unanimously Tuesday to adopt a bill to eliminate a requirement that new teachers compile a portfolio before they can be licensed in North Carolina. S. 931 (Shubert) No Portfolio Required/Teacher Certification now goes to Gov. Mike Easley to be signed into law. The State Board of Education adopted the portfolio requirement in 1998 as a way for second-year teachers to show they had met the state's teaching standards. It was suspended last year in favor of studying alternatives.

Economic Development

Boat builder chooses Forest City for plant site
Mako Marine International Inc. and SeaCraft Boats, a division of Tracker Marine Group, has chosen Forest City as the site for a new boat manufacturing facility that will create more than 300 new jobs with competitive wage rates averaging $13 per hour, Gov. Mike Easley announced Tuesday. The company will renovate a 338,000-square-foot former textile plant for its operations. The N.C. Department of Commerce worked with the Rutherford County Economic Development Commission and the N.C. Marine Trade Association to recruit the company to Forest City. Mako Marine produces salt-water sport fishing boats. Founded as separate companies in the late 1960s in south Florida, Mako is credited with the original development of the center-console fishing boat design, while SeaCraft is known for the unique variable-plane hull surface and builds salt-water sport fishing models from 20 to 32 feet in length. The company employs nearly 2,000 associates and has more than 400 dealers worldwide.


State Government

Revenue Department wins major tax ruling against retailers
The N.C. Department of Revenue has won an important legal victory in its quest to defeat a tax-avoidance scheme by employed by national retailers. The decision has implications for more than $150 million in state taxes due to the widespread use of this tax planning technique. The department had assessed corporate income and franchise taxes against nine wholly-owned subsidiaries of the Limited Stores Inc. In tax-free transactions, the Limited Stores and eight of its retail subsidiaries – Lane Bryant Inc., Lerner Inc., Victoria’s Secret Inc., Abercrombie & Fitch Inc., Cacique Inc., Limited Too Inc., Express Inc. and Structure Inc. – transferred the trademarks they owned to the taxpayers. The taxpayers then licensed the trademarks back to the retail companies, which paid royalties to the holding companies based on the retail companies’ sales. The effect of these transactions was to significantly reduce the retail corporation’s tax liability. The holding companies paid no tax to North Carolina or any other state on the royalties.

Last year, however, the N.C. Tax Review Board upheld a decision by Revenue Secretary Norris Tolson that the holding companies were doing business in the state and are required to pay North Carolina corporate taxes. The companies appealed the board’s ruling to Wake County Superior Court Judge Leon Stanback, who issued an order last week affirming the two lower decisions. At issue in this case is approximately $2 million. The ruling has far-reaching implications for other companies that engage in similar accounting and tax maneuvers. The technique of creating a holding company in a tax haven state to avoid paying North Carolina taxes – one marketed by tax firms – has gained in popularity in recent years. To date, the Department of Revenue has identified more than $150 million in corporate income and franchise taxes at issue due to this practice.
 

DOT sets hearing on Wilkesboro bypass
The N.C. Department of Transportation (NCDOT) will hold an informational workshop on the proposed Wilkesboro-North Wilkesboro Bypass and the U.S. 421 Bypass in Wilkes County. The workshop will be held Tuesday, June 10, from 4 p.m. to 7 p.m. in the Wilkesboro Civic Center at 1241 School Street, Wilkesboro. DOT proposes to construct a four-lane roadway on new location to bypass Wilkesboro and North Wilkesboro. The DOT also proposes to construct the U.S. 421 Bypass from N.C. 16 to the Yadkin River, west of Wilkesboro. The proposed U.S. 421 Bypass would be a four-lane divided roadway.

Names in the News

Another Republican enters crowded race to succeed Burr
John Cosgrove of Clemmons has become the ninth Republican to enter the primary for Cong. Richard Burr’s Fifth Congressional District seat. Cosgrove is a small business owner who ran in the 12^th District GOP primary in 2000 and lost. Others in the crowded GOP field include Joe Byrd, a former Wilkes County commissioner; Robert Clark and Vernon Robinson, members of the Winston-Salem City Council; state Sen. Virginia Foxx of Banner Elk; Jay Helvey, a Winston-Salem businessman; Ed Powell, a former member of the state House and a former DMV commissioner; Jim Snyder, a Lexington attorney who ran in the 2000 GOP senate primary; and Nathan Tabor, a Kernersville businessman.

 Richard Vinroot, the former Charlotte mayor who lost the governor’s race to Mike Easley in 2000, confirmed speculation that he will run again for governor in 2004. It will be Vinroot’s third try for the Governor’s Mansion. He is the third Republican to announce for the race, joining Davie County commissioner Dan Barrett and Southern Pines businessman George Little. Jim Cain, the Raleigh lawyer and former executive with the Carolina Hurricanes, announced he will not run for governor in 2004. However, Senate Minority Leader Patrick Ballantine of Wilmington is expected to announce his candidacy soon.

 Dennis Wicker is recovering from quadruple bypass heart surgery. The former lieutenant governor, who now practices law with the Helms, Mulliss & Wicker firm in Raleigh, underwent surgery in Pinehurst on April, then spent four days in the hospital and was home recuperating for about two weeks before returning to work.

 C.D. Spangler Jr. of Charlotte, chairman of the C.D. Spangler Construction Co. and a former president of the UNC System, begins a one-year term next month as president of the Board of Overseers at Harvard University. Spangler earned a master's degree in business administration from Harvard and has served five years on Harvard’s board.

Washington Watch

Passage of compromise tax cut bill means
employers must update withholding tables

The $350 billion compromise tax cut bill signed into law Wednesday by President George Bush will change tax laws over the coming 10 years, but its impact will be felt almost immediately. Within the next few weeks, 25 million eligible families will begin receiving child tax credit checks of up to $400 per child. And employers need to get busy making plans to adjust the tax withholding schedules for their workers.

Employers should use these new tables as soon as they can work them into their payroll systems, but not later than July 1. By the third week of June, employers can expect to find in the mail a printed copy of Publication 15-T containing all the tables. You can also download a copy of the withholding tables from the IRS web site.

The new law extends the 10 percent rate to cover the first $7,000 of taxable income for single persons, $14,000 for married couples. It also lowers the tax rates above 15 percent to 25, 28, 33 and 35 percent. This is a drop of two percentage points for each rate except the top one, which went down 3.6 points.

The new law also raises the standard deduction for married couples to $9,500 and extends their 15 percent tax rate to $56,800 of taxable income. Each figure is double the number for single taxpayers. The changes reduce the “marriage penalty” – the difference between the tax that couples pay and the amount they would have paid as two single persons. Below is a summary of the tax relief package that NCCBI obtained from Congress’ Joint Committee on Taxation:

Acceleration of Certain Previously Enacted Tax Reductions

 Accelerate the Increase in the Child Credit: The child care tax credit was increased to $600 in 2001 and was scheduled to increase to $1,000 over 10 years. The credit is now increased to $1,000 for tax years 2003 and 2004. After 2004, the amount of the credit reverts to the level provided under present law. The credit is allowed to the extent of regular income tax and AMT after Dec. 31, 2001. The $400 increase in 2003 will be issued as advance refund checks sent to eligible taxpayers based on information on 2002 returns.

 Accelerate marriage penalty relief:  The basic standard deduction amount for married taxpayers filing a joint return is set at twice the basic standard deduction amount for single individuals for 2003 and 2004. For taxable years beginning after 2004, the relationship between the standard deduction for joint filers and single filers reverts to present law. The provision is effective for taxable years beginning after Dec. 31, 2002, and before Jan. 1, 2005.

 Accelerate the expansion of the 15-percent rate bracket for married couples filing joint returns: The conference agreement increases the size of the 15 percent regular income tax rate bracket for married taxpayers filing joint returns to twice the width of the 15 percent regular income tax rate bracket for single returns for taxable years beginning in 2003 and 2004. For taxable years beginning after 2004, the rate brackets revert to present law. The provision is effective for taxable years beginning after Dec. 31, 2002, and before Jan. 1, 2005.


Accelerate Reductions in Individual Income Tax Rates

 Ten-percent regular income tax rate: The conference agreement accelerates the increase in the taxable income levels of the 10 percent rate bracket so that the income levels currently scheduled for 2008 become effective in 2003 and 2004. Thus, for 2003, the taxable income level for the 10 percent regular income tax rate bracket for single individuals is increased from $6,000 to $7,000, and for married taxpayers filing joint returns from $12,000 to $14,000. For 2004, these amounts are indexed for inflation. For taxable years beginning after Dec. 31, 2004, the taxable income levels for the 10-percent rate bracket revert to the levels provided under present law. The provision is effective for taxable years beginning after Dec. 31, 2002, and before Jan. 1, 2005.

 Reduction of other regular income tax rates: The conference agreement accelerates the reductions in the regular income tax rates that are scheduled for 2004 and 2006. Thus, for 2003 and thereafter, the regular income tax rates in excess of 15 percent are 25 percent, 28 percent, 33 percent, and 35 percent. The provision is effective for taxable years beginning after Dec. 31, 2002. The provision does not modify the application of the present-law sunset to the rate reductions as contained in the Economic Growth and Tax Relief Reconciliation Act of 2001.

 Alternative minimum tax exemption amounts: The conference agreement increases the alternative minimum tax exemption amount for married taxpayers filing joint returns and surviving spouses to $58,000, and for unmarried taxpayers to $40,250 for taxable years beginning in 2003 and 2004. The provision is effective for taxable years beginning after Dec. 31, 2002, and before Jan. 1, 2005.


Growth Incentives For Business

 Special depreciation allowance for certain property: The conference agreement provides an additional first-year depreciation deduction equal to 50 percent of the adjusted basis of qualified property. Qualified property is defined in the same manner as for purposes of the 30-percent additional first-year depreciation deduction provided by the Job Creation and Workers Assistance Act of 2002, except that the applicable time period for acquisition (or self construction) of the property is modified. In general, in order to qualify for the 50-percent additional depreciation deduction, the property must be acquired after May 5, 2003, and before January 1, 2005. Property does not qualify if there was a binding written contract for the acquisition in effect before May 6, 2003. Property for which the 50-percent additional first-year depreciation deduction is claimed is not eligible for the 30-percent additional first-year depreciation deduction. The provision is effective for taxable years ending after May 5, 2003.

 Increase Section 179 expensing: The conference agreement provides that the maximum dollar amount that may be deducted under Section 179 is increased to $100,000 for property placed in service in taxable years beginning in 2003, 2004, and 2005. In addition, for purposes of the phase-out of the deductible amount, the $200,000 amount is increased to $400,000 for property placed in service in taxable years beginning in 2003, 2004, and 2005. The dollar limitations are indexed annually for inflation for taxable years beginning after 2003 and before 2006. The provision also includes off-the-shelf computer software placed in service in a taxable year beginning in 2003, 2004, or 2005 as qualifying property. With respect to taxable years beginning in 2003, 2004, and 2005, the provision permits taxpayers to make or revoke expensing elections on amended returns without the consent of the Commissioner. The provision is effective for taxable years beginning after Dec. 31, 2002.

Reductions in Taxes on Capital Gains and Dividends

 Reduce Individual Capital Gains Rates: The conference agreement reduces the 10- and 20-percent rates on capital gains to five (zero, in 2008) and 15 percent, respectively. These lower rates apply to both the regular tax and the alternative minimum tax. The lower rates apply to assets held more than one year. The provision applies to sales and exchanges (and payments received) on or after May 6, 2003, and before January 1, 2009.

 Dividend tax relief for individuals: Under the conference agreement, dividends received by an individual shareholder from domestic and qualified foreign corporations generally are taxed at the same rates that apply to capital gains. This treatment applies for purposes of both the regular tax and the alternative minimum tax. Thus, under the provision, dividends are taxed at rates of five (zero, in 2008) and 15 percent. The provision applies to dividends received in taxable years beginning after 2002 and before 2009.

Temporary State Fiscal Relief Fund

 The conference agreement provides relief to States by establishing a temporary fund to provide $10 billion divided among the States to be used for essential governmental services, and $10 billion for Medicaid (FMAP). The provision is effective on the date of enactment.

Corporate Estimated Taxes

 The conference agreement provides that 25 percent of the corporate estimated tax payments due on Sept. 15, 2003, are not required to be paid before Oct. 1, 2003. The provision is effective on the date of enactment.

OSHA issues ergonomic guidelines for grocery stores
The federal Occupational Safety and Health Administration has announced draft ergonomics guidelines for retail grocery stores and is inviting public comment on the proposals. It is the second industry that OSHA has developed ergonomics guidelines, following those issued for the nursing home industry. The grocery story guidelines can be downloaded from the OSHA web site at www.osha.gov/SLTC/ergonomics.
 
"The grocery store industry has reduced occupational injuries by a third over the last 10 years, from 12.5 per 100 full-time workers in 1992 to 8.1 in 2001," said John L. Henshaw, Assistant Secretary of Labor for Occupational Safety and Health. “But workers are still injured in this industry, and we hope these guidelines will help employers reduce the injury and illness rate still further."

The guidelines are intended to provide practical solutions for reducing ergonomic-related injuries and illnesses in retail grocery stores. They do not address warehouses, convenience stores, or business operations that may be located within grocery stores, such as banks, post offices or coffee shops, although they may be useful to employers and workers in those workplaces. They will not be used for enforcement purposes. OSHA is also working on guidelines for the poultry processing and shipyard industries, and will make drafts available for comment.

Interested parties must submit written comments on the draft retail grocery store ergonomics guidelines to the OSHA Docket Office by July 8, 2003. After the conclusion of the comment period, there will be a stakeholder meeting in the Washington, DC metropolitan area to discuss the draft guidelines.