Budget cuts alone? Or tax increases, too? House Democrats were still trying to answer that question Tuesday as a package of proposed tax hikes ran into trouble on multiple fronts, just three weeks before the start of the new fiscal year.
With public pressure building on the House to use new revenues to fill at least part of the $4.6 billion shortfall in the 2009-10 budget—and an encouraging nudge from Gov. Bev Perdue—House Democratic leaders trotted out a $940 million package of tax increases Monday night.
But it failed its first test Tuesday morning when the House Finance Committee rejected an appeal from its senior chair, Rep. Paul Luebke, D-Durham, and instead voted to delete the $122 million it had proposed to raise by hiking tobacco taxes, including a 25-cent-per-pack increase in the cigarette tax.
The committee went into recess immediately after the vote.
A coalition of Triad Democrats, farm community Democrats from eastern North Carolina, and anti-tax Republicans clobbered the tobacco-tax hike by a 22-7 vote. Rep. Van Braxton, D-Lenoir, said the federal government just raised cigarette taxes 62 cents a pack and the General Assembly enacted a ban on smoking in restaurants and bars. "We don't need to keep hammering the farmers," Braxton said.
It wasn't clear whether all of the remaining parts of the package would survive the House debate. If they do, the Senate could pass them, amend them or—the least likely outcome with Democrats in control there, too—reject them completely. Gov. Perdue, while notably unspecific about which taxes she prefers (her initial budget plan included a $1-per-pack cigarette tax hike plus $200 million from higher taxes on alcohol), told House leaders Monday that they should balance spending cuts with some tax hikes. A final budget will need her signature.
Without the cigarette tax, this is what was left of the House package on Tuesday:
- A quarter-cent sales tax increase, with the sales tax extended to some new products (warranties, for example) and services
- Higher income tax rates on those earning over $200,000 per year, with a 0.5 percent hike on incomes from $200,000 to $500,000 and an additional 0.25 percent hike over $500,000
- Higher alcohol taxes
Chris Fitzsimon, president of the progressive N.C. Policy Watch, said there's "a lot to like about the package," especially the higher rates on the wealthy. Raising taxes is preferable to spending cuts during a recession, Fitzsimon wrote on The Progressive Pulse, the organization's blog, because it helps to preserve jobs. And raising state income taxes is partially offset for the well-to-do by the fact that they're deductible from federal income taxes, he added.
The idea of raising booze taxes, though, came under attack from a trade association representing some 280 North Carolina restaurants. The American Beverage Institute said alcohol taxes land disproportionately on the little guys and gals, "those who are least able to pay them." It cited a study by the Tax Foundation that said folks making $20,000 a year or less pay such taxes at 18 times the rate of those making $200,000 and up.
Rep. Earl Jones, D-Guilford, on the other hand, attacked the House plan as "weak, not bold or aggressive enough" to stave off devastating cuts in education, social services and Medicaid for the poor. "We have citizens who are really hurting," Jones said. "This is not enough to turn this state around."
Jones was among those voting against the tobacco-tax hike in the finance committee. He said he wants "other sources" of money found.
The $4.6 billion shortfall is about 20 percent of the $23 billion that would be needed to continue state programs without cuts—the biggest gap since the Depression.
Filling one-quarter of the gap with new revenues isn't "some outlandish effort," Rep. Larry Hall, D-Durham, said, that will cause the rich to leave the state or not move here at all. "The whole nation is facing the same challenges we're facing," Hall said.
But Republicans like Rep. Johnathan Rhyne, R-Lincoln, accused the Democrats of giving "little or no consideration" to the bad consequences of raising taxes, saying it could harm the state's ability to recruit new businesses.
Going into the week, top Democrats were saying privately that with no Republican support for anything, House Democrats were about 10 votes short—because conservative members weren't persuaded—of the majority needed to pass any tax increases. The House is also 10 votes short—because progressives won't do it—of passing a budget without tax increases.
When Wake County Democrats fill newly appointed Sen. Dan Blue's empty House seat later this week, the Democrats will hold 68 seats in the 120-member House.