Legislature Has Eye of Half-Cent Sales Tax

When state legislators adopted a half-cent sales tax for the state in 2001, it was supposed to be temporary.

“It’s not a permanent tax,” House Speaker Jim Black said at the time. As a result, the state’s half-cent tax is scheduled to expire in June 2003.

But as a new legislature prepares to tackle a budget shortfall for 2003-04 that is already projected at $1.8 billion, some are already questioning whether legislators can afford to give up a tax that raises almost $400million a year for the state.

One of the first – and most fundamental – questions for the 2003 General Assembly will be whether to lift the “sunset” on the half-cent sales tax.

“It’s the first thing you have to figure out,” said Kim Cartron, an analyst at the nonprofit N.C. Budget & Tax Center, who says that sales taxes place a disproportionate burden on poor and middle-income workers.

“We think the sales tax isn’t the right tax to use to dig out of a recession,” Cartron said. “But obviously you’re going to have to have some kind of alternative revenue source. You’re not going to be able to cut your way out.”

Opponents at Citizens for a Sound Economy, an anti-tax group in Raleigh, are already organizing to make sure that legislators understand that the group will consider a vote to extend the tax beyond its scheduled demise a tax increase.

“If it doesn’t sunset, any way you count it, it’s a tax increase,” said Jonathan Hill, the group’s state director.

Though some might argue that extending the tax isn’t technically a tax increase because the sales-tax rate won’t increase, Hill said, “From our perspective, it means that the tax burden will increase, because it was supposed to go down.”

In campaigns this year, Citizens for a Sound Economy persuaded 47 members of the new N.C. House and 20 members of the N.C. Senate to sign a pledge that they will not vote to increase taxes.

Hill said that his group plans to score any vote to extend the tax as a tax increase on the scorecards that it sends to its voter members.

CSE targeted members who broke a similar pledge in 2001, and at least two of those members – Reps. David Redwine, D-Brunswick, and Andy Dedmon, D-Cleveland – lost in November.

Hill compared the situation about the “temporary” sales tax to one that developed with a state sales tax on food that was imposed as a “temporary” measure in 1961 but not repealed until the mid-1990s.

“The problem I see is that every time you add on a half-cent sales tax, they say they’re going to take it away, and then they don’t take it away,” he said. “If you’re going to do that, then nothing they do is real…. You can’t do business that way.

“Somebody’s got to deal with the real problem, which is cutting the size of government.”

New members say they know about the approaching budget challenge.

Rep.-elect Patrick McHenry, a newly elected Republican from Gastonia, said he expects freshmen to resist all tax increases, including the extension of the sales tax.

“If you look at the freshmen in the House, our feet are to the fire,” McHenry said. “We’re in swing districts, and we ran on job creation and no tax increases. We’ll resist all tax increases.”

Rep. Leo Daughtry, R-Johnston, the Republican nominee for speaker of the House, said that few members want to extend the sales tax. But Daughtry stopped short of saying that it won’t happen.

“I think people are going to try to live by what they said they would do. But whether they can or not remains to be seen,” he said.

But Cartron said that there might be hope in a recommendation this week from a commission appointed by Gov. Mike Easley that is expected to recommend broadening the sales tax to include services ranging from legal, accounting and consulting services to lawn and diaper services.

“We would like to see the sales-tax base broadened to include services, in an attempt to lower the rate,” she said. “That seems like a move that would revive a tax that we feel is clearly eroding.”

Currently, Cartron said, “You wouldn’t pay a tax on a diaper service, but you would pay a tax on Pampers.”