RALEIGH, N.C. (AP) — A North Carolina Senate panel endorsed a tax overhaul Wednesday that gradually repeals corporate income taxes without a major expansion of sales taxes.
The new Republican plan approved by the Senate Finance Committee avoids the debated sales tax additions of a previous proposal but still drew criticism from Democrats, left-leaning policy analysts and the AARP. The new plan likely heads to the Senate floor for a vote Thursday.
The latest plan is one of a series of overhauls pitched by Republican lawmakers to broaden sales taxes to new goods or services in exchange for lower corporate and income tax rates.
There's wide agreement that the state needs to reform a Depression-era tax code that ranks North Carolina the highest in the Southeast in overall rates. The divisions come in the details. Republicans, who control the legislature, say economists generally agree that a modern overhaul calls for lower rates and sales taxes that extend to more services.
The overhaul is a substitute for a House-approved plan. The Senate's first plan added sales taxes on more than 100 services as well as food and prescription medications, which opponents said would disproportionately hurt the poor and elderly.
In response to concerns from local governments, the latest plan would repeal local sales taxes on food effective November of 2014 but would allow counties to authorize their own taxes by referendum. If they wait five years, they could levy a local tax on food with only a resolution from a county commission.
In addition, the plan gradually sets a flat income tax rate of 5.25 percent by 2015. Going farther than the first Senate plan sponsored by Sen. Bob Rucho, R-Mecklenburg, the new plan totally eliminates corporate taxes as well as business franchise taxes by 2017 and 2018 respectively. Rucho publicly opposed the latest measure, saying true reform extends sales taxes to services in a modern economy.
The elimination of corporate taxes would make North Carolina one of just four states that don't tax those earnings, according to the Tax Foundation, a conservative-leaning think tank based in Washington, D.C. The Tax Foundation argues the package of changes will dramatically improve the state's competitiveness.
The state Chamber of Commerce backed the Senate's latest plan.
While the plan wouldn't add new sales taxes for services, it does eliminate a number exemptions ranging from movie tickets to back-to-school specials. Those moves prompted criticism from independent theater owner Herman Stone, who said those changes fail the cause of tax reform by leaving preferential treatment for some.
An analysis from legislative staff finds every single tax bracket would see some sort of cut, ranging from $66 for the lowest earners to $5,000 for single filers earning $250,000. Those cuts are higher than scenarios under a House bill that adds a limited number of new sales taxes for services, but the Senate analysis assumes a full repeal of local sales taxes on food.
Sen. Harry Brown, R-Onslow, said no plan will pass without dissent from various interest groups, but few dispute the need for tax changes, and the time to act is now.
"Anytime you try to move the needle, you're going to have someone that opposes what's trying to happen, because, again, on the front end there seems to be some winners and losers because most, I think, can't see the long-term effect of what we're trying to do," he said.
Democrats and other opponents see the long-term effects as destructive to state services, harmful to the poor and damaging to local governments.
The bill removes more than $4 billion from state revenues over five years, accelerating each year. Losses to local revenue reach $177 million annually by the 2017-18 fiscal year, according to legislative staffers.
The North Carolina League of Municipalities concluded the various changes in the new proposal will lead to net losses of $150 million at the local level, which leaves only the options of cutting services or raising property taxes.
But Sen. Josh Stein, D-Wake, said the benefits of the plan will go to a privileged few. Citing analysis from the left-leaning Budget and Tax Center, he said 50 percent of the billions in tax cuts go to the wealthiest 1 percent of earners.
"We are going to have a blank check where the people are going to have to pay," he said. "Who are we writing this check to?"
The AARP came out against the bill, saying it would subject Social Security income to state income taxes, potentially lead to higher property taxes and slow the growth of health care spending. An analysis from legislative staff shows Social Security recipients will either pay the same taxes or less under the Senate plan.