$500 million in deductions added to NC tax plan

RALEIGH, N.C. (AP) -- A North Carolina House panel endorsed a Republican tax plan Tuesday after adding a half-billion dollars in deductions to help the housing industry, drawing criticism from the bill's lead sponsor that the amendment will require raising overall tax rates to make up lost revenue.

The House Finance Committee approved the plan after tense debate on several amendments, one of which would have gutted a credit for film production. The proposal is one of three competing overhaul packages designed to reduce individual and corporate tax rates in exchange for more sales taxes covering a broader array of services. The House proposal is widely viewed as a more measured approach and has the backing of Gov. Pat McCrory.

Committee Co-Chairman Mitchell Setzer, R-Catawba, told members he'd call for a vote after about an hour of amendments and debate, which sparked outcries from lawmakers of both parties.

Rep. Paul Luebke, D-Durham, said it would be hasty to move the bill to the floor before lawmakers get the chance to offer all their amendments.

"We had less than an hour on this bill (in the last committee)," he said. "This is, as (bill sponsor) Rep. (David) Lewis has said, the most major change to our tax code in decades."

The House plan replaces the state's multi-tiered income taxes with a flat 5.9-percent rate and reduces corporate taxes from 6.9 percent to 5.4 percent over five years. The plan also lowers sales taxes from 6.75 to 6.65 percent in most parts of state but adds services to physical personal property such as cars. By contrast, the Senate plan that is seen as a more far-reaching overhaul eventually adds more than 130 sales taxes, which are viewed by critics as disproportionately harmful to the poor.

Opponents of all three Republican plans say they benefit the wealthy at the expense of lower-wage earners. An analysis of the House plan from legislative staff shows nearly every income bracket would pay less, with the benefits building up the income ladder. For example, an individual earning $20,000 would pay just slightly less than under current rates while someone making $1 million would pay $16,000 less.

The House plan also eliminates personal exemptions and caps deductions for mortgage interest and charitable giving at $25,000.

Rep. Julie Howard, R-Davie, argued those changes will hurt a fragile housing recovery and the people who bought homes depending on exemptions for property taxes and deductions on their mortgages. She posed an amendment eliminating the cap and restoring the property tax exemption.

"We are slowly coming back, and if folks really look at what makes the great state of North Carolina function, it is the building industry," she said. "When they're down, we're down."

Rep. David Lewis, R-Harnett and the bill's lead sponsor, cited staff analysis that Howard's change would require finding $525 million to make up for lost revenue. That will inevitably lead to higher overall income tax rates, which runs contrary to the goal of the bill, he said.

"It just makes sense that the larger the base, the lower you can tax," he said. "If you shrink that base, the tax has to go up."

Howard's amendment passed on a voice vote.

An amendment from Rep. Mike Hager, R-Rutherford, led to a rehash of a debate over the value of the state's film tax credits and government's role in economic development. His amendment would have prevented production companies from pocketing the difference between what they owe and the value of a credit for in-state expenses.

Supporters, many of whom reside in districts flush with film investment, say the approximately $75 million given to production companies the past two years has led to hundreds of millions in direct and indirect economic impacts. Opponents, citing a recent study from legislative staff and a number of reviews from other states, say the evidence that the credits actually create jobs is suspect at best.

A bipartisan bill aimed at accomplishing the same purpose is still sitting in a House committee.

Rep. Jeffrey Collins, R-Nash, argued the millions spent subsidizing films could've been used to lower tax rates for everyone or make investments in public education.

"I get really weary of millionaires in adjunct industries we don't have to have saying that without tax dollars, they're going to leave and go somewhere else," he said.

Opponents of the amendment argued those millions go to pay local labor and suppliers, not to pad profits. Some also noted the credit already ends in 2015, and many companies have already made investments based on that assumption.

The amendment failed in a divided vote.

A failed Democratic amendment would have maintained the bill's 5.9 percent personal income tax rate while keeping the highest current rates for the state's wealthiest residents and going farther to lower corporate rates. Republican opponents argued the amendment was nothing more than political theater and would actually hurt many business owners who are taxed in upper income brackets.

The bill heads to the House floor Wednesday, when members are expected to add new amendments that they couldn't propose during the limited committee debate.