NC House tax overhaul plan gets tentative OK

RALEIGH, N.C. (AP) -- North Carolina's House gave initial approval Friday to a Republican tax code overhaul that would lower personal and corporate income tax rates while subjecting more services to the sales tax.

House leaders called the bill a step toward fulfilling the GOP's pledge for tax reform this year after two decades of talk by state politicians about the idea. They disagreed with Democrats who argued on the floor that the changes will result in all but the wealthiest citizens having to pay more taxes.

"The Republicans are fulfilling a promise that they made to the citizens of this state," House Majority Leader Edgar Starnes, R-Caldwell, said just before the chamber gave it preliminary OK by a 72-32 vote. "It's an historic day."

The bill was supported by all Republicans voting just two days after the legislation got derailed when GOP House members disagreed over the future of deductions for mortgage interest and charitable giving.

With a compromise on that issue settled, all Republicans present for a rare Friday session backed the measure that would reduce three individual income tax brackets — including a 7.75 percent rate for the highest wage earners — to one rate of 5.9 percent.

The corporate income tax of 6.9 percent would decrease incrementally to 5.4 percent by 2018.

The current income tax rates are the highest in the Southeast. Republican Gov. Pat McCrory, who also wants tax changes, has said he would like those rates to decrease so North Carolina can be more competitive with surrounding states to attract new business or allow existing ones to expand.

"It does not penalize those who are trying to make more and trying to advance themselves in the economic world," said Rep. David Lewis, R-Harnett, the bill's chief sponsor.

A final House vote is expected Monday before the bill moves to the Senate, where Republican leaders back a more dramatic tax overhaul that McCrory hasn't endorsed.

Starting in July 2014, the combined state and local sales tax people in most counties pay would be reduced from 6.75 to 6.65 percent. But there would be some changes or additions to the list of transactions and services that would have a sales tax.

New taxable items would include warranties and maintenance activities and more services like car repairs. A 3 percent tax on electricity would now be taxed at the full rate.

Groceries still would be taxed at 2 percent and prescription drugs would remain exempt from the sales tax.

The package would mean $1.7 billion less for state coffers through mid-2018 compared to making no tax changes, according to an analysis from General Assembly staff.

The proposal would actually increase revenues by $47 million next year but result in $580 million less revenue for the 2017-18 fiscal year than currently projected.

Republicans used parliamentary maneuvers to deny Democrats votes on the substance of their amendments to require higher tax rates for people making the most income — a minimum of $500,000 to $1 million, depending on filing status.

Otherwise, "this is a millionaire's tax cut bill," said Rep. Paul Luebke, D-Durham.

Democrats, citing a study from the North Carolina Budget & Tax Center, said 95 percent of taxpayers — those making less than $169,000 — on average will experience a tax increase under the current bill, largely due to the sales tax changes.

"House Republicans shifted the tax burden in our state to the middle class and working families," House Minority Leader Larry Hall, D-Durham, said in a statement after the vote.

Tax reform, Hall added, should be about "closing special-interest loopholes and ensuring our tax code treats taxpayers fairly."

The amendments also would have revived the state's version of the earned income tax credit, which is set to expire next year and Democrats argue would ameliorate the sales tax expansion for low-income families.

Republicans offered statistics from the legislature's research staff showing scenarios in which the proposal would result in overall tax reductions for incomes from $20,000 (a $2 reduction for a married couple with two children) to $200,000 (a $1,161 reduction).

The package would increase the current $100 per-child tax credit to $250 for most tax filers. A $50,000 business income deduction on individual returns approved in 2011 would be repealed.