Live Blog of Debate on New North Carolina Senate Tax Reform Proposal

June 12, 2013

Yesterday afternoon we reported on the introduction of a new Senate tax reform proposal in North Carolina. Today, the Senate Finance committee will hear debate on the proposed legislation at 1:00pm EST. A live audio feed can be found here. We'll be covering the committee hearing here on the blog. Updates will be posted below.

Update (1:17pm EST): Senator Berger (R) introduced the legislation again, noting that the bill would "bring North Carolina into the 21st century in terms of tax policy" and will thus bring the state to the forefront for jobs and economic expansion among the states. An amendment was proposed which would add a year and another tier for the phase-in of the sales tax exemption for nonprofits. It would give larger nonprofits (hospitals were specifically mentioned) more time to acclimate to the change. The amendment was adopted.

Update (1:25pm EST): A question was raised regarding local government funding–will this bill cause a revenue decrease for local governments? Senator Berger discussed the local food tax. The legislation would repeal the food tax that is given to local governments, but allows counties to levy their own food tax in order to raise revenue.

A second concern regarding the sales tax increase on mobile and modular homes and its effect on low-income taxpayers. According to the discussion, under the legislation, the sales tax on mobile homes would increase 300 percent; the sales tax on modular homes would increase by 95 percent.

Currently, Social Security benefits are not taxed at all at the state level. This bill will impose a tax on Social Security income to the extent that it is taxed at the federal level.

Update (1:40pm EST): Concerns were raised by Senator Stein regarding the lost tax revenue and the accrual of tax cut benefits to higher-income North Carolinians. Senator Rucho expressed concerns that HB 998 was not comprehensive tax reform (Senator Rucho's tax reform proposal can be found here). Senator Rucho's plan (SB 677) contained a very comprehensive sales tax base broadening to services and explicitly exempted business inputs from the sales tax. The current Senate legislation removes the sales tax exemption on a number of business inputs. Sales tax should not be applied to business inputs because it leads to tax pyramiding (see page 6 of this for more info on this topic).

Update (1:52pm EST): Discussion is now open to members of the public. Points raised include:

  • The President and CEO of the North Carolina Chamber of Commerce noted that "tax policy is de facto economic development policy." Further, he said, "we are pleased that Senator Berger has brought this forward" and says the legislation sends the signal that NC is competitive for jobs and business.

  • Herman Stone, a small business owner in Mecklenburg County, expressed concern that this legislation "targets a specific industry." Namely, this raises taxes on movie theatres. This legislation would apply the general sales tax to movies, amusements, and live entertainment, which are currently subject to a special gross receipts tax (that is lower than the general sales tax rate). Mr. Stone said this will increase the price of admission. There are merits to simplifying the tax code so that all transactions are subject to the same sales tax rate. Namely, it increases simplicity and neutrality.

  • A representative from the North Carolina Budget and Tax Center argued that this legislation will lead to a local revenue loss and thus higher local taxes later, will lead to cuts in state services provided, and that the benefits of income tax cuts will accrue to higher-income taxpayers. She argued that the corporate income tax cuts will only benefit 10 percent of state residents.

  • A representative of AARP expressed concern that Social Security benefits are taxed under this plan, though applauded the dedication to tax reform. Most states currently do not tax Social Security (see here for more info on states that tax SS benefits). They also worried that this proposal would not generate enough revenue to provide government services and that the legislation would lead to later property tax increases.

Update (2:01pm EST): The discussion moved from long-term vs. short-term benefits of tax reform. One Senator argued: "I can tell you this, doing nothing…is no answer" and that "the status quo is not working in North Carolina." Senator Berger provided closing remarks prior to the vote, urging Senators to support the legislation.

Update (2:05pm EST): The Senate Finance committee passed the proposed committee substitute to HB998.

Check out our book on tax reform in North Carolina, and our testimony in the Senate Finance committee yesterday.

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