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A thumbs up for major business tax cut in Senate

May 17th, 2019

— A divided Senate voted Thursday to roll back a state business tax after back and forth between Republicans and Democrats on the efficacy of trickle-down economics.

Republicans, with the stronger numbers, won out on the bill, 26-19. A single Democrat joined them: Sen. Paul Lowe, D-Forsyth.

Lowe said he was swayed by a Wednesday addition to the legislation that would give Reynolds American, one of the largest employers in his district, a $4 million tax cut.

The broader bill lowers the state’s franchise tax, which taxes businesses on their net worth, by some $250 million once a two-year phase-in is complete. These would be the initial steps toward future legislation to end the tax, which Republicans at the statehouse consider one of the more onerous government drags on economic growth.

Senate Bill 622 also includes a small personal income tax cut, and it would boost sales tax collections on internet sales by more than $100 million a year, softening the franchise tax cut’s impact on the state budget.

Republicans cast the bill as another supercharger for an economy bolstered the last several years by a string of GOP measures that lowered the state’s corporate income tax rate. Democrats attributed North Carolina’s economic growth more to national trends and said this is no time to cut taxes further, with unmet public school needs, hopes for expanded health coverage through Medicaid and the likelihood of recession in the coming years.

“I think we have different priorities,” said Sen. Harper Peterson, D-New Hanover. “The rich get richer and the poor get poorer, and this bill supports that 100 percent.”

Republican leaders predicted state revenue will actually increase under the bill, as more businesses open in, or relocate to, North Carolina to take advantage of a better tax structure. They noted that, for years, they’ve cut taxes here and, for years, Democrats’ gloomy predictions have failed to manifest.

State tax collections outstripped predictions for several years running, and this year, the state’s budget surplus looks to be about $700 million. Gov. Roy Cooper’s administration predicted two years ago that GOP tax cuts would “blow a $600 million hole” in the state budget.

Sen. Paul Newton, R-Cabarrus, a bill sponsor, said Thursday that Democrats “have to have a little bit of faith and understand economics.” He promised that “revenues will exceed whatever expectations you have in your mind.”

The debate may be largely academic. Cooper has said he’s against the bill, and without more help from Democrats, the Republican majority isn’t enough to override him if he vetoes it.

Senate Bill 622 would reduce the current franchise tax of $1.50 per $1,000 of net worth to $1.30 this year and to $1 the year after that. It would also enact “market-based sourcing,” which would change the way businesses located out of state, but with customers in North Carolina, are taxed.

The franchise tax cut would save businesses about $105 million in the first year, growing to an average of about $260 million a year after the full phase in.

The bill would would also:

  • Increase the standard deduction for personal income taxes from $20,000 to $20,750 for married couples in 2021.
  • Require more companies that sell products on the internet to charge state sales tax, bringing in an average of $134 million more a year, per staff estimates.
  • Extend the sales tax exemption NASCAR currently has in North Carolina to 2024.
  • Extend the tax exemption on jet fuel airlines enjoy to 2024.
  • Extend the state’s historic rehabilitation tax credit to 2024.
  • Tinker with the state’s definition of a holding company to end what lawmakers said is a double tax on Reynolds American that resulted from its recent mergers. This would save the company about $4 million a year.

It will take one more Senate vote, likely Monday evening, to move the legislation to the House. The Republican majority there has already signed off on the measure’s broad strokes.

Sen. Floyd McKissick, D-Durham, tried to tack an amendment onto the bill Thursday to revive the state’s earned income tax credit, which helps the working poor. Republicans used their superior numbers to table that effort.

McKissick said there might be “one or two” provisions in the bill Democrats could support, but the state simply doesn’t need these changes, particularly following previous corporate tax cuts and with unfunded needs in public schools.

“I’ve not run into a single business that basically made a decision ot locate in North Carolina or not based on the franchise tax,” McKissick said.

The bill’s total impact would be about $200 million less a year in state revenue once it’s fully in place, according to legislative staff. Those predictions don’t assume any economic boost from the tax cuts themselves, though, and Senate President Pro Tem Phil Berger said the state has consistently beaten these sorts of predictions.

Berger, R-Rockingham, said he’s confident that will be the case this time, too. He expressed no fear that these cuts could be a bridge too far. He also pointed to the state’s rainy day fund, which Republicans have built up to $1.25 billion, even after last year’s hurricanes caused the state to dip into those reserves.

“Now, we may have a dip, we may have a recession,” Berger said after Thursday’s vote. “But overall, in the next 10, 15, 20 years, I have confidence that, in North Carolina and in this country, we will continue to see overall growth.

“The environment that state government creates for job creators, for employers, is extremely important,” he said. “You’re going to be in better shape than other states are when folks are deciding where to locate.”

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