A major breakthrough in budget negotiations occurred this week when House Democrats agreed to vote to raise taxes and restore funding that would have been cut from the State Budget.  What was originally a $900 million tax increase was trimmed to $780 million during the Finance Committee meeting this week.  Those tax increases were merged into the larger budget bill (Senate Bill 202) by a vote of the full House yesterday.  The House will return to work tonight for final votes expected just before and just after midnight. 

The largest tax increases, an increase in the sales tax rate by ¼% and an increase the marginal income tax rates on top income earners, survived the Finance Committee meeting and will be included in the bill voted on tonight.  Also included is a new sales tax on warranties, installations and repairs and the dramatic changes in taxation of businesses in North Carolina.  The finance committee removed from the bill, increases in taxes on cigarettes, beer and wine. 

The largest increases in taxes would be achieved by raising the upper-income tax bracket rate from 7.75% to 8.25% on income between $200,000 and $500,000, and to 8.5% on income over $500,000.  Those changes would net the State about $257 million next fiscal year.  The ¼% increase in the sales tax rate would bring in an additional $195 million.  A more dramatic change affects what is subject to sales tax, and the proposal to bring warranties, installations and repairs (including maintenance) under the sales tax would bring in $176 million. 

Other changes proposed in the bill represent fundamental shifts in the way North Carolina taxes business and industry.  One section of the bill would require that businesses file a single tax return for unitary business.  The so called "mandatory combined reporting" provision has been the subject of protracted debate at the legislature and is projected to raise $18.5 million in the first year and $40 million once fully implemented.  That portion of the bill also includes a "throwback" rule that would include sales made to out of state non-NC taxable corporations or the US Government at a cost of $6 million to those businesses.  Another section would impose a franchise tax on all limited liability business entities, an expansion that would bring in $59 million to state coffers.  Additional changes in the sales tax include: taxation of online purchases and digital goods totaling $13.2, taxation of amusements and movies totaling $23 million, and a new tax on courier services that deliver parcels would result in $25 million.  Lastly, the bill would increase tax on liquor sales in the state. 

The driving force behind the tax increase is to restore funding to programs and organizations that would have been reduced or eliminated under prior versions of the House budget proposal.  The additional revenue would restore funding to Medicaid services, retain employment for thousands of teacher and school support personnel, and continue various state government programs or services.  Even with the additional $780 million, the State projects eliminating hundreds of state government jobs, and reducing key services and programs.  Procedures require the House to vote on the bill twice on two separate days and votes are anticipated later tonight and shortly after midnight tomorrow.  After approval by the House the bill will return to the Senate where it is nearly certain that the House bill would be rejected and a conference committee formed to resolve the differences arising between the two versions of Senate Bill 202.  Lawmakers appointed to the conference committee would have a little over a week before the end of the State Fiscal Year on June 30. 

The Senate moved ahead with other legislative business this week, including passing bills that would make illegal texting on a mobile phone while driving (House Bill 9), amend the rules related to water quality in Jordan Lake (House Bill 239), and to redraw House Districts in Pender County to conform with the US Supreme Court ruling in Strickland v. Bartlett (House Bill 1621).  In other action, the Senate approved legislation that would confirm Governor Perdue's appointment of Lorinzo Joyner, Bryan Beatty, and Tonola Brown-Bland to the Utilities Commission.  Also approved by the Senate this week was a bill (House Bill 1021) to designate portions of Highways 17 and 70 in eastern North Carolina "The U.S. Marine Corps Highway:  Home of the Carolina-Based Marines since 1941."  Lastly, both chambers paused to remember the life and times of US Senator Jesse Helms who represented North Carolina in the United States Senate from 19972-2003 by passing Senate Joint Resolution 1103 this week. 

Due to ongoing action at the General Assembly tonight, this report is abbreviated from our usual format.  Details of the House budget debate will be included in our weekly legislative update next week.