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NC Senate gives first OK to GOP tax overhaul

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RALEIGH, N.C. -

A Republican tax overhaul plan that would lower personal income taxes and gradually repeal corporate taxes in North Carolina cleared the first of two votes in the state Senate Thursday.

The Senate tentatively approved a plan Thursday mostly along party lines that goes farther than a previous proposal to lower overall tax rates, but it foregoes a broad expansion of sales taxes to new services. The plan's chief backer called it a compromise that would put people back to work.

Critics argue that the $7.4 billion in cuts to income and corporate taxes over five years will largely benefit the wealthy and force local governments to raise property taxes to recoup lost revenue. Others call the plan an inadequate answer to true tax reform.

Republicans, who hold supermajorities in both chambers of the General Assembly, have pitched a series of plans aimed at lowering overall tax rates, which are the highest in the Southeast. There's wide agreement that the state's 1930s-era tax code needs reform, but lawmakers disagree about how to do it.

The House already approved a plan that doesn't lower tax rates as much and expands the sales taxes to cover more services. The Senate's first proposal also didn't lower rates as much and expanded the sales tax to cover more than 100 additional services.

Sen. Bob Rucho, R-Mecklenburg and the sponsor of the first proposal, resigned his leadership post in the Senate Finance Committee Thursday in protest over the new Senate plan, which he argued isn't fair or truly comprehensive in a service economy.

The bill is scheduled for a final vote Tuesday. From there, the House and Senate would have to resolve differences between their plans in a conference committee.

The most recent Senate plan would establish a flat income tax rate of 5.25 percent by 2015. In five years, both the corporate income and franchise taxes would be gone, as would various state and local privilege license taxes. Taxes on food — included under Rucho's plan, along with prescription drugs — would be repealed, but local governments could levy their own to recoup lost revenue.

By the 2017-18 fiscal year, personal income and corporate tax cuts would total $2.3 billion a year, according to analysis from legislative staff. That same year, the state government would have $1.3 billion less in revenue and local governments would have $177 million less in their coffers.

The proposal offsets some of the revenue impact of the tax cuts with new sales taxes on utilities and by closing off some exemptions and refunds, including for nonprofits. That's prompted anger among interest groups such as nonprofit hospitals, which are major employers in many counties.

The North Carolina League of Municipalities and county commissioners across the state say that the revenue losses would require higher property taxes or severe cuts to services.

The sole amendment of an hours-long debate came from Sen. Clark Jenkins, D-Edgecome, who tried to restore a number of agricultural and business-purchase exemptions. The amendment failed after Sen Leader Phil Berger, R-Rockingham and the main backer of the most recent Senate plan, argued it would put the plan "out of balance."

Republican supporters of the proposal argued it may be imperfect, but that any attempt at tax reform comes with opposition from interest groups who fear losing preferential treatment.

Berger said his plan will help create jobs in a state with the fifth highest unemployment rate in the country.

"That will translate into additional business activity in North Carolina," he said. "That will translate into all sorts of good things for people who are looking for jobs, who are starving for jobs."

Sen. Dan Clodfelter, D-Mecklenburg, led an unsuccessful tax overhaul effort in 2009. He said the Senate plan is unsound and not comprehensive, arguing it injects budgetary discussions into the debate by considerably slowing the scale of growth and expands harmful business-purchase taxes without broadening the sales tax base as a whole. Local governments will raise property taxes to make up for millions in lost revenue that's going to a limited number of corporations, he said.

"What I'm really struggling to find is conclusive evidence that the small business taxpayer is going to do better," he said.

Rucho offered many of the same criticisms. He said the plan fails the principles of good tax reform by forgoing new taxes on the sizable service economy and drastically cutting rates for a narrow subset of businesses.

"We are giving away a $1.8 billion loophole when we go zero on franchise tax and corporate tax," he said.

An analysis from legislative staff shows taxpayers would receive a greater tax cut under the latest Senate plan than under the House plan, though those figures assume a repeal of food taxes. Legislative staffers also released data showing social security recipients who would now be taxed by the state wouldn't pay more.

An analysis from the liberal-leaning Budget and Tax Center disputed the social security claim, saying the legislative analysis relies on specific samples within the categories. The Center found other examples of taxpayers within those same categories that would pay more.

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