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N.C. tax hike would come from familiar sources

RALEIGH (AP) ó If House Democrats agree this week to raise taxes to help narrow North Carolina’s $4 billion-plus budget gap, don’t expect unconventional ideas floating in the legislature to generate revenues, like legalizing video poker again or Sunday liquor sales.
And neither a $1-per-pack increase in the cigarette tax sought by Gov. Beverly Perdue nor reform of the tax system being proposed by Senate Democrats has yet to receive strong support by House members.
So House leaders may have to rely on old standbys ó raising sales taxes or income taxes, or both ó if they want to mitigate some of the proposed cuts that could eliminate more than 10,000 positions in the schools and some government-paid health services.
That’s because the two taxes comprise more than 80 percent of North Carolina’s revenue base and can generate large amounts very quickly because nearly everyone pays them. They also may be the best options on which to find a final compromise with the Senate this summer.
Democrats increased those tax rates during the recessions of 1991 and 2001. This year, sales and income tax collections have dropped dramatically. Legislative analysts say it may be 2014 before state revenues return to their high-water mark at current rates.
“You’ve got to go where the money flows, and the money flows though sales tax and the income taxes primarily,” said former Rep. George Miller, a Democratic co-chairman of the House Finance Committee in the 1990s.
For example, a half-penny increase on the sales tax ó most consumers would pay 7.25 percent instead of 6.75 percent ó would increase revenues more than $400 million annually. A half-percent increase in the top individual income tax rate ó from 7.75 percent to 8.25 percent ó would raise up to $140 million.
Add several smaller tax and fee increases and it may negate some of the cuts that have raised ire among health care providers and public education boosters.
“Before the General Assembly takes a giant step backwards, we urge them to strike a balance between cost-cutting and appropriately increasing tax revenues to get us through this recession,” said Debra Horton, president of the North Carolina PTA, representing a coalition of public school advocates.
House Democrats haven’t agreed on a tax plan. With or without such a proposal, the House is set to vote on its state government budget for the next two years by the end of the week.
“It’s going to take an extraordinary amount of taxes to make any kind of a dent in the reductions we’ve made,” Rep. Mickey Michaux, D-Durham, senior co-chairman of the House Appropriations Committee, said late last week. Michaux said that amount may be more than $1 billion.
Republicans say prioritizing spending would ease the more onerous cuts without additional taxes. An anti-tax rally was assembled by conservative groups for the day after the Together NC rally.
“The reason that we’re in a recession is that people don’t have money. And every economist I know says the worst time to raise tax rates is when you’re in recession,” said House Minority Leader Paul Stam, R-Wake.
Approving new sales and income taxes again in 2009 would be rife with political land mines for Democrats inside and outside the Legislative Building.
Only look at 2001 to see the political toll it may take.
House and Senate Democrats fought for months over whether to approve a sales tax increase alone, or to couple it with an income tax increase on the highest wage earners so the burden wouldn’t fall disproportionately on the poor. The House won by getting both, but only after the intraparty standoff caused hard feelings between the two chambers.
A faction of House Democrats, which included Michaux, essentially held up negotiations, fanning the flames of a feud with then-House Speaker Jim Black.
Republicans also jumped on the taxes, which were labeled “temporary” and set to expire in 2003. But the taxes were extended, giving Republicans an easy target on which to campaign in legislative elections.
This year, Sen. David Hoyle, D-Gaston, a finance committee co-chairmen, said he would prefer the Senate’s proposed overhaul to North Carolina’s income and sales tax system get approved in some form.
It would reduce tax rates, expand sales taxes to include more activities and close corporate loopholes while generating $500 million more next year. But Hoyle said legislators may have to consider raising the sales tax to alleviate the deepest cuts.
“We’ve got to have money fast,” he said.
Rep. Paul Luebke, D-Durham, Hoyle’s finance counterpart in the House, said taxing services are receiving some discussion among House Democrats.
He wouldn’t say whether House Democrats are looking at raising sales or income taxes. But he said those taxes getting attention are the same that have been raised or lowered in recent years.
“Generally, the options considered have been there for a long time,” he said.

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