House Extends Half-cent Tax

Raleigh News and Observer
Dan Kane

The Republicans talked about runaway spending. The Democrats talked about protecting schools, health care and public safety.

In the end, the Democrats who lead the state House prevailed, tentatively voting to extend a temporary half-penny sales tax for another two years, along with a temporary half-percentage point increase in the personal income tax rate for high earners. It was strictly a party-line vote -- 63-55 -- save for one GOP lawmaker who said she voted yes in error.

The $562 million tax package would also increase taxes on several other goods and services, while eliminating taxes on some others. It is part of a national effort to streamline sales taxes so the states can collect from purchases over the Internet. Those measures have a net effect of raising $62 million a year in additional taxes.

Democrats said they needed to hold onto the sales and income tax increases, first passed in 2001 as the recession hit, because the economy hasn't turned around enough to help pay for growing education, health care and public safety needs. The sales tax alone would bring in $413 million next year.

"Which 3,000 kids do we not want to enroll?" asked Rep. Rick Glazier, a Fayetteville Democrat. "Which 5,000 do we want to let out of prison, and which 100,000 do we not want to provide with health care?"

The package may not be the end of tax increases sought by the chamber. House leaders are considering a tobacco tax increase as part of their budget plan.

Republicans said the House was again breaking its promise to eliminate the sales and income tax increases. The increases were supposed to last only two years, but lawmakers and Gov. Mike Easley extended them for two more in 2003. Easley and the Democratic-led Senate have already announced support for extending the sales tax increase into 2007, but their budget proposals also called for reducing or eliminating the income tax increase.

Republicans also said that House Democrats were not looking hard enough at cutting unnecessary spending in putting together a budget.

"I don't believe anyone in this room can look me in the eye and say we give a dollar's worth of value for every dollar we take," said Rep. John Blust, a Greensboro Republican.

The current $16 billion budget is about $1 billion more than the previous year, and budget proposals by Easley and the Senate would increase spending by another $1 billion. But Rep. Paul Luebke, a Durham Democrat and Finance Committee co-chairman, cited research by the nonprofit N.C. Justice Center that said per capita spending by the state, when adjusted for inflation and population growth, has declined by $313 from fiscal year 2000 to fiscal year 2005.

State revenue is growing faster than expected. The latest estimate from the legislature's economic analyst, David Crotts, shows that tax revenue will come in at $527 million more than he had estimated. But nearly all that growth comes from one-time tax payments that can't be counted on in future years, he said.

House Speaker Jim Black, a Democrat from Mecklenburg County, said the tax package paves much of the way for House budget writers to put together their spending plan. He said he hopes to have a proposal to the floor by next week, though he said it may come out a week later. That leaves little time to negotiate a final budget with the Senate and Easley. The fiscal year starts July 1.

But if the Senate and Easley go along with the House's tax plan, they will have avoided the elimination of the temporary sales tax increase, which would have expired June 30. They also will have approved a continuing resolution that keeps government running at current spending levels for 30 more days.

Black said the continuing resolution doesn't mean he is planning to let the budget deadline pass. He said it gives him negotiating power as the fiscal year comes to a close.

"I don't want to get into too much of a box on the budget bill," he said.


Here's what the $562 million tax package does: - Extends the half-penny temporary sales tax increase and half-percentage point income tax increase on high earners for two more years. - Adds or increases sales taxes to 7 percent for candy, liquor, cable and satellite TV and radio services, warranty service contracts, and telecommunications services. - Keeps government operating for another 30 days if a budget is not passed by July 1, the start of the next fiscal year. - Ties the repeal of the state estate tax to the repeal of the federal estate tax, which is scheduled to take effect in 2010. - Makes several other changes to conform with new federal tax laws.

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