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    Panel's tax plan trims fat

    BY Wade Rawlins
    04/07/2001
    by Wade Rawlins on 4/7/01.

    A commission appointed by Gov. Mike Easley to study tax loopholes and government cost-saving measures delivered a list of tax code changes Friday that eventually would produce more than $ 200 million a year in revenue and possibly millions more in savings.

    The Commission on Efficiency and Loophole Closing also shifted some of the pain of the tax changes away from consumers and back to corporations, rewriting an earlier list of recommendations that would have saddled individuals with more of the new taxes.

    Under the recommendations, consumers would have to pay sales tax on movie tickets, satellite television, lawn fertilizer and food purchased from vending machines. Consumers and businesses would pay tax on out-of-state long distance phone calls.

    The panel not only added recommendations to narrow a pair of corporate tax deductions, but it also dropped proposals to start applying sales tax to services such as automobile and appliance repair and deleted a proposal to reduce the amount of government workers' pensions exempt from taxation.

    "We believe that these modifications will improve the balance between business and individual loophole closures," said Rick Carlisle, a panel member and former secretary of commerce.

    In appointing the commission, Easley had asked the members to find $ 150 million in revenue by closing loopholes and $ 25 million in savings. The panel exceeded those goals. It identified $ 177.9 million in tax loopholes in the first year and $ 141.5 million in savings. The amounts increase in the second year.

    Now, Easley will decide which of the panel's recommendations he likes.

    David McCoy, state budget director, said Easley would discuss the list with his senior staff and make recommendations to the legislature the week of April 16.

    The legislature, which is confronting the worst budget crisis since the early 1990s, ultimately would have to approve any tax policy changes for them to take effect.

    Former Gov. Bob Scott, who was co-chairman of Friday's commission meeting, predicted that the legislature lacked the political will to accept many - if any - of the recommendations because of a mindset of no new taxes.

    "They may accept some," Scott said in an interview, speaking for himself, not the full panel. "I would be greatly surprised if they took them verbatim. I'm not even sure the governor is willing to send all of them."

    Scott said Easley would have to put the force of the governor's office behind any recommendations he wanted the legislature to pass.

    The panel's decision to drop a proposal to impose sales tax on the total costs of repairs of tangible property such as appliances and automobiles came at the urging of Carlisle and Dan Gerlach, executive director of the N.C. Budget and Tax Center, a nonprofit group that represents low-income people on spending issues.

    Carlisle and Gerlach said the commission's recommendations should not establish new tax policy. Currently, only parts are taxed, not services.

    "Taxes on services is a major new policy direction," Carlisle said.

    Then, at urging of Carlisle and Gerlach, the commission also dropped its earlier proposal to reduce the amount of exemption of the government workers' pension from $ 4,000 to $ 2,000.

    The commission took up two proposals that would raise additional taxes from corporations.

    One change would narrow the loophole on taxation of corporate subsidiary dividends by conforming state law to federal law.

    Sabra Faires, deputy commission of the Department of Revenue, told the commission that North Carolina's law on subsidiary dividend deductions was much more generous than the federal law.

    "We don't believe this jeopardizes our competitive position," Carlisle said.

    But Commerce Secretary Jim Fain, who attended the meeting, said the change had the potential to be detrimental to the state's competitiveness. But he said neighboring states treated the deductions law as it was being proposed.

    The other corporate tax change would bar companies from deducting royalty payments when the payments go to closely affiliated companies.

    Together, the two would generate $ 45 million in added revenue.

    "We had to strike a balance," Gerlach said. "Some of these things are clearly what people think of as loopholes."

    Among the recommendations for greater government efficiencies were enhancing the Department of Revenue's efforts to collect the estimated $ 120 million in back taxes. The group estimated that could bring in $ 32 million in the first year.

    In addition, the group recommended giving agency managers greater budget flexibility and allowing them to keep 2.5 percent of any budget savings, which could be used on one-time expenditures.

    George Miller, a member of the panel and a former Durham legislator, said the group had made great strides, but he didn't want the public to think the commission had done an exhaustive study of the tax code in the few weeks it had to work.

    "We barely touched the surface of what can be perceived as loopholes in the revenue laws," Miller said.

    The panel's work drew a quick response from some anti-tax groups. One, N.C. Citizens for a Sound Economy, fired off a letter to legislators, warning them that tax increases were not in the best interests of the state.

    ###

    Tax loophole recommendations:

    Here's a look at the nine tax changes the Efficiency and Loophole Closing Commission recommended to Gov. Mike Easley on Friday.

    - Children's health insurance. Repeal the income tax credit for taxpayers who pay health insurance for dependent children. The tax credit ranges from $ 100 to $ 300, depending on income. Elimination of the tax credit anticipates the allocation of funds to expand the Health Choice program. Revenue - $ 18.9 million annually.

    - HMOs. Impose a 1.9 percent gross premiums tax on HMOs. Under current law, HMOs are not subject to a gross premiums tax as are other insurance companies. Twenty-three states tax HMOs, 15 at lower rates than other insurance companies. Nine other states do not impose a gross premiums tax. Revenue - $ 19.5 million annually.

    - Telephone calls. Tax all telecommunications at 6 percent. The recommendation attempts to simplify the tax rate on phone calls by applying a 6 percent sales tax. Currently, in-state long distance phone calls are taxed at 6.5 percent and local calls at 6.22 percent, but interstate long distance calls are not taxed. Revenue -$ 37.5 million the first year and $ 90 million the second year.

    - Movies, direct television and other entertainment. Tax all amusements at 5 or 6 percent. Currently, the state tax rate on movies is 1 percent and the tax on live shows is 3 percent. There is no tax on direct television. Live entertainment and movies would be taxed at 6 percent. Satellite and cable television would be taxed at 5 percent. Revenue -$ 20.7 million the first year, increasing to $ 31 million annually.

    - Vending machines. Eliminate special tax treatment of vending machine sales by imposing a uniform 6 percent sales tax on all vending machines sales. Currently tobacco products and canned soft drinks sold through vending machines are taxed at 6 percent. Other items, such as prepared food, are taxed at a lower rate. Revenue - $ 2.5 million the first year, increasing to $ 6 million the second year.

    - Fertilizers and seed. Levy a 6 percent sales tax on fertilizers and seeds sold to nonfarmers. Currently, all fertilizer and seeds are exempt from sales tax, an exemption dating back to the era when these items were primarily for food production. An increasing volume of these items are for residential and commercial uses such as golf courses and lawn maintenance. Revenue - $ 5.3 million annually.

    - Limited liability companies. Apply franchise tax to limited liability companies and reduce the annual report fee from $ 200 to $ 20. Most states that have a franchise tax do not apply the tax to limited liability companies. Revenue - $ 6 million annually.

    - Corporate subsidiary dividends. Narrow the loophole on taxation of corporate subsidiary dividends by making state law conform to the federal tax law. A varying percentage of the dividend would be deductible, depending on the degree of ownership. This treatment was in place in North Carolina until 1997 for most corporations. Revenue - $ 30 million annually.

    - Royalty payments. Impose Ohio law royalty adjustments. This would prohibit companies from deducting royalty payments as a business expense when payable to an affiliated company. Revenue - $ 15 million annually.

    (Compiled by Staff Writer Wade Rawlins)