House budget prompts tax, spending disagreements with Senate

by Colin Campbell, The Charlotte Observer, May 18, 2015.

State senators and House members could spend the coming weeks debating income taxes and spending levels after the House’s budget proposal – released Monday – highlighted divisions between Republicans in the two chambers.

The House’s draft would increase general fund spending by $1.3 billion, or 6.3 percent, from the previous year – well above the 2 percent increase in Gov. Pat McCrory’s budget. The additional spending reflects a projected revenue increase of about 6 percent.

The new spending includes a 2 percent raise for most state employees – including the governor – as well as more funding for schools and the extension of tax credits aimed at specific industries.

But Republican senators could push for less spending. Sen. Bob Rucho of Mecklenburg County, the Senate Finance chairman, said a 6.3 percent budget increase “is definitely not sustainable.”

“I think the governor is closer to reality” with a 2.3 percent hike, Rucho said.

The senior House budget writer, Rep. Nelson Dollar of Cary, disagreed. “I think it’s very responsible,” he said of the spending increase. “It’s very much in line with inflation and population growth.”

Tax policy could also feature prominently in this year’s budget talks. The House proposal doesn’t include any changes in income tax rates, although it would restore a tax deduction for medical expenses.

But both Rucho and Senate leader Phil Berger have said the rosier revenue numbers mean that “now is the time” for more tax cuts.

“I think there’s definitely room to move in that area,” Rucho said Monday.

Rucho is among several ranking Senate Republicans behind a bill that would lower personal income tax rates to 5.625 percent in 2016 and 5.5 percent in 2017. The current rate is 5.75 percent, down from 7.75 percent several years ago.

While the House proposal doesn’t change tax rates, it would extend tax credits for solar and other renewable energy projects, technology data centers and research and development.

Those credits have McCrory’s backing, but some Senate Republicans aren’t fans. Rucho points out that GOP-led tax changes sought to eliminate tax breaks in favor of lower overall rates.

“I think the General Assembly spoke last year in getting rid of them,” he said. “I don’t see any reasons to be backtracking, especially when it may mean a tax increase.”

Concerns about the credits prompted some House Republicans to vote against the budget in the Finance Committee Monday, although it ultimately passed in a 19-16 vote.

The House budget doesn’t include several priorities outlined by Berger last week. The Senate leader called for an annual transfer of highway tax dollars to budget items that aren’t related to transportation, as well as a change in how the state calculates corporate income taxes. Neither are in the House budget bill.

Pay raises: The 2 percent pay raise proposal differs from the budget proposed by Gov. Pat McCrory several months ago, which instead called for targeted salary increases for hard-to-fill positions in state government.

As legislative leaders had promised, the budget would increase starting pay for teachers to $35,000. State employees, including teachers, who are due for a salary step increase would get them.

The House’s pay plan would cost an estimated $361 million for the fiscal year beginning in July. State retirees would receive a 2 percent cost-of-living increase under the budget plan.

Film grants: The state’s film grants program – currently out of money after awarding $10 million in grants – would get $60 million each fiscal year, with next year’s funding coming from the current budget surplus.

Help for start-up businesses: A new N.C. Venture Multiplier Fund – proposed by McCrory – would get $40 million to “provide a source of funding for innovations and inventions that have potential commercial value.”

Lottery proceeds: The plan would take $2 million from N.C. Education Lottery proceeds to use for “gambling enforcement activities” operated by the state’s Alcohol Law Enforcement agency.

Medical tax break: The budget would restore a tax deduction for medical expenses – a perk that was eliminated under GOP tax changes, prompting outcry from seniors and others who paid more this year. The initial budget draft would have applied the deduction to seniors only, but the House Finance Committee agreed Monday to offer the deduction to anyone with qualifying medical expenses – a $54 million change that the top budget writer, Rep. Nelson Dollar of Cary, said would be too costly.

Tax credits for industries: House budget writers want to extend tax credits for solar energy projects for two years, although other renewable energy projects would get four more years of tax credits – costing the state about $47 million in fiscal year 2016-2017. McCrory had called for ending the solar credit in his budget proposal, arguing that the solar industry in North Carolina had “matured” and no longer needed a tax break to be viable.

The budget would also create a new tax break aimed at airlines, allowing them to avoid sales taxes on aircraft service contracts starting in 2017.

The tax credit proposals are already drawing fire from both conservative and liberal groups. Americans For Prosperity, a conservative group, called it a “taxpayer-financed handout,” and the liberal N.C. Justice Center was also critical.

“By failing to pause the corporate income tax cuts and also prioritizing further tax breaks to big business, policymakers are missing the opportunity to build opportunity” by better funding services that benefit the poor and middle class, said Alexandra Sirota, director of the group’s Budget & Tax Center.

Sirota’s comment references revenue triggers in the current tax law that are expected to further lower the state’s corporate income tax rate.

Historic preservation: The House plan would restore a scaled-back tax credit for historic preservation projects – a program that the House has already approved, but faces opposition in the Senate. McCrory has traveled the state lobbying for the program, which would cost $8 million a year.