NC Senate pitches 'compromise' tax overhaul plan

RALEIGH, N.C. (AP) -- The North Carolina Senate unveiled a new tax overhaul plan Tuesday that would gradually eliminate corporate taxes without adding any new sales taxes to services.

The latest plan introduced by Senate Leader Phil Berger marks a dramatic shift from the Senate's first proposal, which drew criticism for new sales taxes on food and prescription medications. But Democrats immediately seized on the bill, calling it a "charade" that would require drastic reductions to services or shifts to other areas to pay for billions siphoned away from state coffers.

Berger, R-Rockingham, called the bill a "compromise" from a previous version that levied sales taxes on more than 100 additional services.

"From the start of this process, we said that elected officials should not pick winners and losers through our tax code," he said. "Taxing mechanics and repairmen in order to give tax cuts to lawyers and lobbyists is not a fair policy."

The first Senate proposal backed by Sen. Rob Rucho, R-Mecklenburg, was one of three plans designed to lower corporate and personal income taxes in exchange for expanding the scope of the sales taxes, which critics say disproportionately hurts the poor. All the proposals replace the state's three-tiered income tax brackets with a flat rate.

There's wide agreement that the state needs to overhaul a Depression-era tax structure that hasn't seen major changes in decades, but the parties disagree about how to proceed. North Carolina has the highest top rates in the Southeast.

The Rucho plan is considered the most radical because of the scale of sales tax changes.

The new proposal was included as a substitute to a recently passed House plan that limited sales tax increases to certain services.

The newest Senate plan creates an even lower flat income tax rate of 5.4 percent in 2014 and 5.25 percent in 2015. The flat rate kicks in after a certain income threshold, ranging from $7,500 to $15,000 depending on filing status.

The new proposal also would eliminate local sales taxes on food by 2016, but a number of sales tax exemptions would be gradually eliminated. Examples include exemptions for vending machines, some newspaper sales and meals sold to patrons in university dining halls.

The new proposal goes farther than the Rucho plan on corporate taxes and business franchise taxes, totally eliminating both by 2017 and 2018 respectively. The franchise tax would be replaced by a flat $5,000 tax for doing business in the state that would apply to corporations with shareholders and a $750 fee for all other businesses.

The elimination of corporate taxes would make North Carolina one of just four states that don't tax those earnings, according to the Tax Foundation, a conservative-leaning think tank based in Washington, D.C.

An analysis of how the changes would affect individual income brackets isn't yet available.

Democrats directed their criticism at what Republicans termed tax cuts but what Democrats consider sizable losses to state revenue. By the 2015-16 fiscal year, the tax plan would take out more than a billion from state coffers annually, growing to $1.3 billion the next year.

Sen. Daniel Clodfelter, D-Mecklenburg, said the billions in cuts will have to come from somewhere.

"What are you going to do? Raise property taxes? The bill leaves no other alternative," he said. "That's why I say it's a charade."

Alexandra Sirota, director of the liberal-leaning Budget and Tax Center, echoed the criticisms of Clodfelter and other Democrats.

"Failing to heed the advice of economists, Senate leaders created a tax plan that will reduce available revenue by more than $4 billion over five years when fully implemented, putting at risk our state's foundation of economic growth - our public schools, universities, infrastructure, and safe communities - all in order to pay for tax cuts that will benefit the wealthiest taxpayers and profitable corporations," she said in a statement.

The new plan heads for a committee vote Wednesday.