THE VIRGINIAN-PILOT
Copyright (c) 1995, Landmark Communications, Inc.
DATE: Tuesday, January 17, 1995 TAG: 9501170318
SECTION: LOCAL PAGE: B1 EDITION: NORTH CAROLINA
SOURCE: BY BETTY MITCHELL GRAY, STAFF WRITER
DATELINE: RALEIGH LENGTH: Long : 165 lines
North Carolinians are certain to receive some sort of tax cut when the state legislature convenes next week.
The only questions that remain are which taxes to lower first, how state lawmakers plan to pay for these cuts and how the cuts will affect government services.
Some say the cuts may kill needed government programs.
Tax and spending cuts will be at the heart of the upcoming legislative session as Republicans work to deliver on their campaign promises and Democrats hope to make political points by appearing more fiscally responsible than in years past.
In a recent survey by The Associated Press, 97 percent of the senators and 95 percent of House members who responded said the state should forgo increased spending where possible this year in favor of tax relief. Responses were received from 32 of 50 senators and 68 of 119 House members.
``The tax-cut bidding war will start when the gavel comes down,'' said John Hood, vice president of the John Locke Foundation, a conservative think tank in Raleigh. ``And when we look at the budget, we're not just talking about a tax-cut debate, we're talking about a spending-cut debate.''
``We're going to have to redefine what we want the state to do,'' he said.
Taxpayers most likely can look for a drop in their income-tax bills - either through a reduction in the tax rate or an increase in deductions - and a repeal of the state's intangibles tax for personal and corporate investors.
But they shouldn't expect a repeal of the state food tax, state lawmakers said, although some reduction is possible.
``The will is not there,'' said Senate leader Marc Basnight, D-Dare. ``People prefer sales taxes.''
Although Gov. James B. Hunt Jr. has not unveiled his budget for the coming year, he has hinted at what taxpayers and government officials can expect.
Last week, Hunt reiterated to business leaders that he plans to reduce spending by $483 million this year and will likely eliminate one Cabinet position.
State government department heads reportedly have been asked to find budget cuts of at least 10 percent - with an emphasis on eliminating employees.
But some say cutting the state's budget without endangering needed government services is easier said than done.
``It's easy to talk about cutting and limiting the state budget,'' said Chris Fitzsimon, founder and executive director of the Common Sense Foundation, a Raleigh think tank promoting liberal issues. ``It's much more difficult when you have to cut programs that affect people's lives.''
Here's a look at some of the latest tax cut proposals under review by the governor and state legislators.
INCOME TAXES
One month after Democrats took a pounding at the polls, Hunt tried to outflank state Republicans by proposing $483 million in tax cuts - the largest decrease in state history.
Most of Hunt's tax cuts - $373 million - would go to individuals. Among the cuts: an increase in the standard income tax deduction for individuals, new tax credits to help working families with children and a larger homestead exemption for the elderly.
Hunt also proposed $110 million in tax cuts for business, including cuts in the corporate income tax rate from 7.75 percent to 7 percent and elimination of the intangibles tax on stocks and bonds.
The biggest piece of Hunt's plan would raise the standard income-tax deduction from $2,000 to $2,500 a person. Hunt also wants a $50-per-child income-tax credit.
But Hood of the John Locke Foundation says North Carolina's taxpayers would see more longterm tax relief from a cut in income-tax rates, not an increase in deductions.
``Income-tax deductions give only temporary tax relief,'' Hood said. ``Over time, inflation will erode the value of those deductions. We want to look at slashing rates.''
Meanwhile, state Republican lawmakers said they are committed to pursuing their proposal of at least a $200 million income-tax reduction for North Carolina taxpayers.
``We will be choosing from a menu of things,'' said Sen. Betsy Cochrane of Davie County, incoming Senate minority leader. ``We are trying to help middle-class, working citizens of North Carolina first . . . and our menu choices will be influenced by our resources.''
In a recent Associated Press poll of state lawmakers, personal income tax cuts were favored by 75 percent of senators and 78 percent of House members. Cuts in the corporate income tax were favored by 62 percent of the senators and House members.
INTANGIBLES TAXES
Eliminating the intangibles tax on stocks, bonds and other investments is the most popular tax cut among incoming lawmakers.
Of incoming legislators responding to an Associated Press survey, 87 percent of the senators and 79 percent of the House members favored cutting the intangibles tax.
North Carolina levies an intangibles tax of 25 cents per $100 market value of stock and shares in mutual funds and levies a tax on bonds and accounts receivable.
``It's North Carolina's most hated tax,'' said Rep. Zeno Edwards, R-Beaufort.
``We need North Carolinians of all economic stations in life,'' Basnight said. But the state is losing many corporations and retirees who depend on income from investments and the money that they bring with them because of the state's intangibles tax, he said. ``Some of them will not come to North Carolina because of the intangibles tax,'' he said.
North Carolina's intangibles tax generates about $125 million in revenues each year, $93 million of which is returned to state and local governments.
The Senate last year approved a bill eliminating the tax, but the proposal died in the House Finance Committee. Instead legislators set aside $28 million for tax relief in this year's budget to cover the state's annual loss from the tax.
Still up for debate is how to make up the greater loss to local governments, a question that concerns one area legislator-elect.
Rep.-elect W.C. ``Bill'' Owens, a member of the Pasquotank County Board of Commissioners for almost 20 years, said that before he endorses repealing the intangibles tax, he wants to know more about how the state plans to reimburse county and municipal governments for their lost revenue.
UNEMPLOYMENT TAXES
Hunt said in late December that he will seek a 23 percent cut in the unemployment insurance taxes paid by employers - a projected savings to them of $51.3 million the first year and $106.2 million over two years. But others say much more needs to be done to reduce a $1.7 billion balance in the state's Unemployment Trust Fund.
Hunt has proposed reducing the percentage of annual average wages used in calculating the taxable wage base from 60 to 50 percent; a reduction in the tax rate for employers who have an unemployment insurance account balance; and a zero tax rate for employers with the best account histories.
If Hunt's proposed unemployment tax cut passes, it would be the third straight cut in the employer tax. In 1993, the General Assembly cut the tax by 30 percent, and last year during the special session on crime, lawmakers cut it again by another 39 percent.
These cuts, designed to reduce the balance in the Unemployment Trust Fund, only slowed its growth, according to the John Locke Foundation.
North Carolina's annual payments to unemployed workers average just under $400 million a year. That means the state has enough money in reserve to pay the next four years' worth of claims - four times the national average. The state has the third largest reserve in the nation.
But instead of seeking another rate cut, the state should persuade Congress to let North Carolina give rebates to the businesses that paid the tax, Hood said.
``This money belongs to the private sector, and it should be returned,'' he said.
FOOD TAX
The single greatest factor in arguments against a reduction or repeal in the state's sales tax on food may be its success at raising revenue for the state, say officials with the state Department of Revenue.
For fiscal year 1994-95, the food tax was expected to generate more than $376.7 million, or about 14 percent of the state's total sales and use tax revenue.
``It's a significant revenue producer for the state,'' said George Good of the state Department of Revenue. ``One of the problems in repealing or reducing the tax is the question of how are you going to make up this revenue.''
A 1-cent reduction in the food tax would cost $82 million a year, according to state budget estimates.
The sales tax on food was enacted in 1961 and was seen at the time as a temporary measure to help fund the state's schools. For most of the 34 years the sales tax has been in effect, lawmakers have discussed repealing or reducing it.
Rather than a reduction in corporate taxes, the N.C. Budget and Tax Center, a newly formed organization that has studied the effects of state fiscal policy on the working poor, favors reductions in the state sales tax on food and nonprescription drugs.
But trimming the sales tax on food was the least popular of proposed tax measures in a recent Associated Press survey. It was mentioned by 53 percent of senators and 48 percent of House members. by CNB