Corporate taxes down, consumer taxes up in proposed state budget

Charlotte Observer
Mark Johnson

May 4--RALEIGH -- Democratic Senate leaders, following a tense and sometimes emotional meeting Tuesday, ratcheted up the proposed cigarette tax increase to 35 cents a pack in a budget that has businesses and the wealthy paying lower taxes and all consumers paying more.

The Senate's budget cuts the corporate tax rate starting in 2007 and trims the rate on the highest income bracket next year while raising taxes on items such as cigarettes, satellite TV and liquor. It creates a state lottery, bans video poker, gives state employees a 2 percent pay raise and lops 57,000 elderly, blind or disabled patients off the Medicaid rolls, shifting them to Medicare.

The $16.9 billion spending plan, a $1 billion increase over last year, was passed out of committee Tuesday and expected to come to the Senate floor for a vote today. It then goes to the House of Representatives for likely changes and eventual negotiations between the two houses of the General Assembly.

Budget writers added $700 million in new revenue to help cover a $1.3 billion gap between revenue and planned spending.

House Speaker Jim Black, a Mecklenburg Democrat, said that packing the lottery into the budget after it narrowly passed the House as stand-alone legislation, "makes it very difficult" to pass the budget in the House.

Gov. Mike Easley, a Democrat, signaled his unhappiness with some elements of the Senate plan and his hopes that the House will make changes. Spokeswoman Cari Boyce said the cigarette tax should go higher and that Medicaid cuts sliced too deep.

Senate budget writers initially proposed a 25-cent bump in the cigarette tax, a little more than half of the 45 cents Easley proposed in February but a healthy rise from the current nickel a pack. Tuesday morning, though, Democratic leaders weren't able to sell the quarter increase to a meeting of their party caucus, which holds the majority in the Senate. Senators raised pointed concerns about a need for revenue, cuts to programs and teen smoking.

"There was a lot of emotion," said Sen. Janet Cowell, a Raleigh Democrat who advocated a higher increase, "not anger, but a lot of feeling."

Senators, visible through glass doors, gestured and showed strained expressions as they spoke. They took a half-hour break to cool down, came back at noon and signed off on the 35-cent increase.

The increase would elevate North Carolina, the No. 1 tobacco-producing state, from the lowest cigarette tax in the nation to 41st and still well below the national average of 84.5 cents. South Carolina would take the title of lowest tax on smokes at 7 cents per pack.

The higher N.C. tax is expected to raise an additional $201 million in the next budget year, which starts July 1, and $230 million the following year.

Sen. Linda Garrou, a Democrat and a chief budget writer, represents a Winston-Salem district that includes R.J. Reynolds Tobacco Co.'s headquarters and plant. She said the company, which employs 4,000 workers, was bound to be upset.

"They felt betrayed by Gov. Easley when he rolled out that tax (increase)," she said. "They'll feel betrayed by the Senate."

The Senate budget also drops the corporate tax rate from 6.9 percent to 6.4 percent beginning in 2007. The state income tax rate would slide over two years from 8.25 percent to 7.75 percent on income over $200,000 for joint filers. Both moves were aimed at ending North Carolina's status as having the highest of both of those tax rates in the Southeast, which Republicans and some Democrats said was handicapping the state's efforts to lure in new businesses.

Corporations "do the comparables with other states and they're glaring," said Senate President Pro Tem Marc Basnight. The cut "would give us a lower number than other states in the Southeast."

Advocates for the poor criticized the move as sacrificing revenue, badly needed for human services programs, to give a break to multibillion-dollar corporations and the wealthy.

Senate Democratic leaders "may as well be Republicans," chided Adam Searing, who heads the N.C. Health Access Coalition.

Both Searing and Elaine Mejia of the N.C. Budget and Tax Center push for policy changes that aid the poor. Mejia said the Senate budget upends any fairness in the tax code.

"We're raising taxes on working families," she said, "we give a tax break to the top 1 percent (of income earners) and we're making serious public service cuts."

Basnight did not dispute that the changes shift some of the tax burden but emphasized that the money goes to fund schools, community colleges and universities that educate lower income and middle-class North Carolinians so they can get better jobs.

"Much of our money we collect, regardless of where we collect it," Basnight said, "goes back to lift people up."


The Senate's proposed budget levies many of the same tax increases as Gov. Mike Easley proposed but added its own twist in several areas. The spending plan includes:


--Continue additional half-cent sales tax passed in 2001.-- Raise cigarette tax from 5 cents per pack to 40 cents per pack.

--Cut top income tax rate from 8.25 percent to 7.75 percent.

--Increase tax on various items, such as telecommunications and liquor.


--Reduces payment to doctors for Medicaid patients.

--At least 57,000 patients off of Medicaid, shifts to Medicare.


--Community college tuition from $38 to $39.50 per credit hour.

--State employees' pay by 2 percent.

--Community college instructors' pay by another 2 percent.

--Rainy day fund by $125 million.


--UNC Chapel Hill and N.C. State could raise tuition without approval from UNC Board of Governors.

--University students from out of state on scholarships receive in-state tuition.

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