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House | June 23, 2015 | Committee Room | Finance

Full MP3 Audio File

Good morning. Welcome to finance. I have finance committee and sergeant at arms, first seat Michael led, Tom and David. We also have first pages with us today in the committee. They are Harry of Wake county, [xx] we recognize you, [xx] Jameson Sam, Denno of Buffered sponsored by Representative Paul Tom. We've got [xx] from four sides Representative [xx] from four side county sponsor Representative Debra. Come me Adref from Watford county sponsored by Representative Mike and Rob the fourth from sponsored by representative Paul which should be in here so today our agenda is to consider and discuss we will not be voting but we will discuss the finance package and the the senate budget so what we will do first is lets start with and overview work history and if you have anything you need there is a signing sheet at the back that sergeant of arms will have available we do anticipate this committee meeting taking it up the full time we do ask you stand up shortly we will be able to the comment I know there will be a lot of question so we better understand what the senate has sent to you describe the tax package and various package so we'll try to get to you as best we can if not, this may flow over into Thursday as well, but finance committee members are here before you if you've come to visit the committee, I'm sure most try to make themselves available to you afterwards if you don't get a chance to speak or give us what's on your mind, so we appreciate you being here we do not need a motion to place the document before us as well we discussed in the document. At this point, I will recognize Mr. [xx] Griffin, will staff give to you, for introduction and to walk us through the Bill, or through the Package. Thank you Mr. Chairman and I just want to make the members aware of the documents that they have before them. So you have the actual House Bill 97 and it's a redacted portion, you can see that it's basically contains only part 32 of the Bill which are Finance Provisions, and then you have two smaller packets, the first says that it includes, a physical impact to one page chart and a current law and bill explanation chart, and that is probably the best document for purposes of walking through the Bill, we'll sort of be going through the Bill Provisions using that chart. The other packet you have has two differences documents, the first one is an economic development comparison of the Provision and House Bill 117 and the senate budget provision and it may be that Dan actually uses that charge to walk though his portion of it, and behind that there is the differences documents that compares the 5th edition of house bill 97 which the house budget finance provision and the 7th edition which the senate provisions, and the last items you have the fairly link the the document about 156 pages and it's a 100 county chart that walks through the sales tax distribution formula proposal by the senate and beneath Canada with fiscal when we get to that portion of the bill will explain how to read that charge and can walk you through it, so we're going to start with the economics development provisions and Dan is going to start with that so as [xx] haven included in your package, the chart comparing economic development provisions contain nad house bill 117 in the economic development provision containing in the senate budget of the senate version of the budget so if you look at the differences documents, the economic development comparison that will show you where those differences are. The book of that comparison deals with the JDIG program and I'm going to review the differences first and then touch on the similarity between the two bills. As you may remember, generally the amount that can be committed in JDIG awards is $15 million per calendar year. Currently that period has been adjusted on our one time basis to the fiscal biennium with an adjusted cap of 22.5 million. Both bills collapse the current fiscal biennium with the last half of this calendar year

which has $7.5 million of availability, however the cut for the collapsed period differs. House Bill 117 increases the cap from 30 million to 45 million, the senate budget increases it from 30 to 35 million. The calender year basis of JDIG availability and stature is also modified by the senate budget and instead of all $15 million becoming available at the begining of each count a year the senate budget has the availability come online in two equal installments on 1, 1 and 7, 1  of each year with any un-utilized potion from the first half of the year to be available for commitment in the second half of the year. The authority to enter into new [xx] commitments ends under current law as a 1116 both bills do extend the program but by different amounts the house extension is four years the senate extension is two years. In terms of branding of the program house bill 117 renames the [xx] program as the job group reimbursement opportunities people program, the Senate Bill does not modify the program nomenclature. Both bills change minimum requirements to participate in the [xx] program, the house changes only with respect to minimum job creation standards for tier three projects, increasing job creation requirement from 20 jobs to 50 jobs. The Senate job creation modification is deeper, for tier one the increase is from 10 jobs to 25 jobs for TIA two it's 20 jobs to 50 jobs, for TIA three it's 20 jobs to 100 jobs and for major market communities which is a new terms, it means counties with the three highest average weekly wages and the increase is from 20 jobs to 200 jobs. In addition the Senate budget adds some minimum wage standards for created eligible positions that must be met in order to participate in JDEC. This is based again on location of project, for TIA one the mineral wage standard is 100% of the average weekly wage for all insured private employees in the county, for TIA two is 105%, TIA three is 110% and for major market communities is 120%. Funding under current law for the utility account comes in large part from JDEC, for projects in TIA two and three, a portion of the business award is diverted into the utility account equal to 15% or 25% of the award respectively. Both bills do adjust the utility account diversion from JDEC awards but in opposing ways. The house for TIA three JDEC awards increases the diversion to the utility account from 25% to 30%, by way of contrast the Senate decreases all the versions to utility account, for major market community awards, utility account diversion goes from 25% to 15%, for Tier 3 it drops from from 25% to 10%, for Tier 2 it drops from 15% to 5% and both bills retain the lack of diversion for Tier 1 JEDEC awards. In calculating the actual worth for participating business, current law provides the maximum JEDEC awards is equal to a percentage between 10% and 75% of the withholding associated with the created eligible positions. House Bill 117 does not change the award calculation, the senate does change the maximum percentage based on project location. For tier one, the maximum percentage is raised to 80%, for all other area designations the percentage is lowered as follows, Tier 2 the maximum percentage is 70%, Tier 3 is 60% and for major market communities it's 50%. The final difference between the bills concerns the fact that JEDEC does not currently have any special provisions for mega-site house bill 117 does not have the specific mega site recruitment provisions but the senate budget for projects for which a business won best, at least $750 million and create at least 2000 jobs would create a classification called high yield projects. In the event, a high yield project has landed certain specific Jay Dig provisions would kick in. First, the $15 million commitment cap for Jay Dig in that year would be increased to $30 million. Second at the business, that's the high yield projects meets the job creation investments minnows and then meets all other form of symmetrics contained in the agreement for three years. The Jay Dig award is augumented in three ways, first, the term may be increased up to eight additional years. Second, the utility account diversion may be eliminated all together, and third, the maximum percentage for Jay Dig award calculation may be increased from the area maximum to 100% of the associates withholding's. That covers the differences for Jay Dig, both bills do have a couple of Jay Dig provisions in common both would require the economic investment committee to find, as a prerequisite, in entering the Jay Dig agreement that the affected local government of

appropriately participated in women offer the progress, senates that bill will convert the recapture provision association with maintaig of payment maintenance operarations for 150% the great term to were mandatory recapture provision and finally both bills we changed the employment measure from being key to the year before the best period begins to be greater point of levels at the date of application with the day of award, both bills also address one in sea and the side In both the house bill, we bring the programs into the job growth we embarse to absolutely couple programs social development fund In the site is always in front respectively regardly, we want to see the bill from the senate only it's one change it multiplys [xx] commercial [xx] that apply to one of your words and currently that's a wonder one flat [xx] [xx] The sooner we change that to a teared match requirement to be in the allocation of the project, the local match requirement for till one will be one local dollar every  three state dollars, but till two will be one local dollar for two state dollars for two or three would remain an even much requirement and for communities it would require for local dollars for every state dollar. Regarding the site infrastructure development fund both bill provide for funding the house provides funding for $20 million  taken from the last years, last year inactive budgetary propitiation to the job catalyst fund. That fund did not pass the senate also provide a new funding but in the form of a general fund appropriation in the amount of $13 million and finally for the tally account, there's one modification that is in the house bill only and it only needs the promise for uses not only for job creation but also for job retention. The senate budget Intentional changes for total count.  So now we'll If you have been suspended then, Ms Clevin if you could make we're all on the same page, we want to make sure that everybody is keeping up.  Sure, I was just going to say something that I forgot to mention, I wanted to let the committee members know that all these documents with the exception of the actual budget bill have been posted to the house finance committee's website so, if anyone needs to get these documents later, they can be found there and, then if you start falling along just making sure that we have a lot of pieces of papers in front of us.  The corporate income tax changes start on page 468 of the budget bill and, then for the best document to fall along is if you have the document that contains the current world and bill explanation. If you turn over to page two of that chat Jonathan will go over those changes. Thank you Trina.   Lets go ahead. so on the bottom of page two of that summary chat, the first item based on the 2013 tax legislation. The corporate tax rate was supposed to be rescheduled to be 4% in 200 rule 16 and 3% in 2017 if certain revenue targets were satisfied. The general consists of forcasts estimates that estimates that these triggers will be reached and the physical impact has been taken into account in both house by Senate budget availability. The senate provision removes figures insist those tax rates instant statues. The next provision Mr. Chairman reading from [xx] thank you very much Okay   it is a different document we have the one that says finance provisions on house 97 current law and bill explanations and turns to page two. [xx] looks like this. Mr. Prad if you'll consider this [xx]. Great, Miss Park. Okay, so we are at the bottom on page two there where succession 32.13 corporate income tax and we just won over their rates 4 % 2015 to previous in 2017. So, the [xx] under that, is that there actually bronze that corporate tax base by eliminating a special provision that had eliminated liability primarily of that handful of banks. On to the

next page there's a privilege tax that bank pay currently is equal to $30 for each one million of assets held and that privilege tax is repealed in this bill, the next provision is another base broadening item that closes a loophole some corporations have intended to use to avoid tax by inflating interest expense that rises on loans for affiliates and then finally in corporate tax the bill eliminate a number absolute deductions moving into section 32.14 this builds [xx] sales single sales factor report over three years and long that move adopts the couple of provision related to point message suggested by the multi-state task commission. In section 32.15 the franchise tax changes and the tax rate is reduced from a dollar 50 per 1000 to $1 for every 1000. The minimum tax has increased from $35 to $200 and the maximum tax is increased from holding [xx] 75000 to 150000 and the franchised tax calculation is simplified to make the calculation more analogous to generally savored accounting principles that concludes the corporate changes Thank you Mr. Clerk the next part of your bill, the summary is on page 4 and if you're following on the bill it would be page 485 and these are the individuals in contacts changes. The first thing that the bill does is to increase the standard deduction beginning in tax year 2016 15, 000 for married filling jointly to $17, 500 and then it will continue to increase it by $250 a year until the tax year 2020 when the standard deduction will be 18, 500 from [xx] jointly. The bill also reduces the income tax rate from five and 3/4% to 2 1/2% in the tax year 2016 and then one of 5 1/2% five and three quarters to five and a half, I'm sorry I gave it a huge reduction. One of the things of the house budget did was to expand the itemize deductions that tax payer may claim to include the medical expense deduction and that was uncapped as you know in the law right now, the state only allows certain itemized deductions. It allows unlimited charitable, it allows home mortgage and your property taxes paid on real estate up to a $20, 000 cap, the house increase the standard deductions to include medical expense with no cap. What the Senate bill does is to allow all itemised deductions that are allowed at the federal levels so that would allow such things as investment interest expenses, job expenses, custody [xx]. There is about twenty different things that a taxpayer can itemize for federal tax purposes. The civic bill will allow a taxpayer to use defences casually in debt losses all of those but it would cap them all at $20, 000 and that would include charitable on that as well, and lastly in the personal income tax area the senate bill would require the Department of Revenue to adjust the withholding tables. So that it would withhold taxes that are rate equal to a tenth of a percent higher than what the actual income tax rate is, and that is to account for various sources of revenue that a person doesn't necessarily pay estimated taxes on or withhold. Something that the department found this year is that they saw a 216% increase in the number of tax payers who filed the return with a tax due, but no tax remitted with the return and the amount owed were relatively small. So this was one way to try to account for that. The next section of the bill 32.17 begins on page 49, and this is your article 5 F exceise tax which is the 1% $80 tax that is payed on the mill machinery and certain others equipments investments that are capitalized under the code, and what this will do will be to increase that rate begins October 1st 2015 from 1% with an 80 dollar gap to the state general sales tax rates and of course right know the state general sales tax rate is 4.74% with the 500 dollar cap and in looking at it fiscal estimated, there are about five thousand returns under this for about 1600 of them there will be

no change most of the revenue gain come from 300 companies by 80%. Section 32.18 are your sells tax changes and they begin on page 490 of the bill. This bill would increase the tax rate on both aircraft from 3% to the state general range. State general range is 4.75%. It would maintain the capital[sp?] on both $1500 but it would increase the capital[sp?] on aircraft $1500 to $5000. It would also effective on October 1st 2015 eliminate the sale tax exemption for installation/. It would expand the sales tax base to include repair services and maintenance services. It would expand the sales tax base to include pet care services and veterinary services, and to include advertising services. The bill would adjust the sale tax refund for non profits. In the 2013 tax reform legislation there was a cap put on the sale tax refund allowed to non profits that amounted equivalent to $45 million. The statute currently refers to it what the sale tax amount is, but what the senate bill does is to change it to base it on the amount of purchases so instead of stating as it is in the statute now that you have a sales tax cap equivalent refund of 45 million it exempts purchases up to $666, 660, 667 dollars that's what equivalent to your 45 million dollar cap. then beginning in 2016 it begins to decrease the amount of purchases so that if you purchase something over this amount you will not be entitled to the sales tax refund. So for 2016, it effectively moves the cap from 45 million to 10 million, then 8 million, 6, 4 and 1 million and it's believed that based on 13/14 there were 48 claimants for the refund, that filed for a refund greater than a $1million. Then the next part is something that the Senate and House have in both budgets, and that is a sales tax exemption for service contracts for qualifying aircraft and jet engines, but there are a couple or three differences. Under the Senate bill that service contract must be purchased within 90 days at the date that the aircraft or engine is purchased. Also what weight qualifies is different under the Senate bill, its 9000 pounds but not in excess of 15. And thirdly, the Senate provision becomes effective October 1st, 2015, the House provision becomes effective in 2017. The next Section of the bill is Section 32.19, it begins on page 496 of your bill and this has to do with the local self tax distribution and Denise will follow me and help you with this chart, but think and trying to gain understanding of this section of the bill will be helpful to turn to you the big document and look on page two and it has just has a chart to charge it tells you the current state of things. As you know all counties have 2% local sales tax right but that is enacted over time in three different articles and you'll see it in that table, Articles 39, 40 and 42 and you'll see the years that they were enacted, and the prepossess for which they may be used. And you can also see the distribution, how they are currently distributed and you'll notice in article 42 when it was enacted in 1986, it was distributed on a per capita basis so for years the distribution was 50% per capita, 50% point of collection in 2007 the general assembly modified it to change it from par capital to point of destination so as you know, right now you have is distributed 25% per capital 75% point of destination. Also there is a 2% sales tax on food that a minister at the state level, the authority came from 39, 40 and 42 but the sales tax revenue from food little bit differently. But first have the [xx] on food is attributed on the per capital basis and then it is adjusted for an adjustment factor, which I will explain in just a second, the remaining one cent is distributed to the county's proportion based on the amount of sales tax that county collected on 3rd in the 1997-1998 fiscal year, also possibly if you turn to your bill, if you're not familiar with the adjustment factor. The adjustment factor, it's something that was put into place, I believe around 1996 was to recognize that many counties had their constituencies going outside of their county to purchase property, will sound very familiar to the

policy decision you're making right now, and counties did not feel that they were getting their share of the distribution. So there was an adjustment they had to be put into place. Because at that time the general assembly made a policy, to change from point of destination to a point of a collection basis as far as where the distributors, it would be distributed, and so if you look on page 496 of 497 of your bill, it is being stricken through, but you will see what the adjustment factor is. So for that half cent that is collected under I think it's article 40 there's an adjustment fact. More than a penny for every penny spent other counties receive less, and when you have that penny on food, the per capita distribution is also adjusted per this adjustment factor, and what this bill does is it would part of what it would do, would be to repeal the adjustment factor and begin to phase in a different distribution that would apply to all three articles the same as well as food. So, instead of the different articles being distributed differently; every article will be distributed exactly the same and it will face an as 60% point of collection, 40% per capita and gradually go from 45 to 55, 30 to 70 so that by the fiscal year 1920 your distribution would be 20% point of collection 80% per capita, but those are lots of variables as you'll see law so when you start comparing. There many different variables that affect what a county receives and how it would be under this bill. Some of the things that are worth noting is that the distribution once County's receive the money, they then just share it with their cities of that 2%. The county's decide how that money will be shared, it is either on per capita basis or low arm[sp?] basis this bill does nothing to change that, that still rests with the county's. When the general assembly had the Medicaid swap then 2007, it provided that counties will be held harmless as well as the cities. Both of those hold harmeless provisions remain intact as you recall last biennium, the general assembly made a policy decision to begin phasing down the county hold harmeless because their hold harmless was going to be your held harmless plus $500, 000. That plus $500, 000 is being phased down now based on the policy decision you made last biennium but the basic hold harmless provision has been in touch and another change is that as you noted on that chart, for the article 40 and 42, sales tax distribution that a county receive, 30% of article 40 has to be used by the county for public school capital outlay purposes and 60% of their article 42 money that to be used for public school capital outlay purposes. This would repeal that provision that require that the counties use the money that they receive from the per capita distribution for public education and community college education and I believe I will just alternative to the Nice [xx] she is going to a little more detail about how to read this chart that you have. In the same packet that [xx] was looking at, if you turn to page three which is [xx] and I will hold it up to you so you can see what I'm looking at. So we are following along, [xx] any question? Special, Okay. Alright thank you, so this [xx] county as an example to show you how to use the document, but before you are up to this, the specific per work explain generally what you are looking at, this document is something that all office prepared when the bill went to senate commerce and then on the senate floor, to give general idea of the effect of the policy changes that Siddy just described and before and after if you will how much revenue minor county or city have gotten with no change s to the law, compared to how much revenue may get with this logic list. I will point that we use the three and a half percent inflation rate for every year which is as you know from compared to the censures revenue forecast that a very [xx] investment, the reason with that data we wanted to used the same growth rate for all years. I make that point to tell you I don't think it affects the before and after as comparison. But it does bearing in mind that this is a policy document to help you understand the policy implications and not a budgeting document. So we have a lot of your town managers and county managers calling and saying well that number is not exactly what I've in my budget for next year, well it's

not and we don't expect it to be. We do expect that the comparison from current law to after should show you the general effect that you'll be seeing at the county and local level. So [xx] the other side on that element county page to use this one as an example. What you have at the top in the smallest chart, is the county and then all the municipalities that are contained within it we've shown that the general fund revenue just for the county, we didn't have that level at this, that detail at the city level but for the county government, we've shown the revenue. Next we've shown there are 13, 14 sales tax distribution for the county and then for all the cities. It's important that the counties lying here, the one that's shaded in grey is not the total of the county and all of the cities below it. That's just the amount that in this case is retained by elements  county government after it pays out to all of its municipalities. In the next column you'll see 14, 15 projected then again projected at a 3.5% growth rate, so for many of your jurisdictions, that will be lower that the actuals that they are seeing. And finally the last part of top chart 15, 16 projected under current law and then under the senate plan. The senate plan does not [xx] distributionin 15, 16 but it did begin basic expansion in 15, 16, so that's the difference between current law and senate plan the senate plan has additional funds that are distributed. If you go on to the next block, the score year 1617 I will walk through this one and then all the reminder is the same as this one that we're about to do. Again you have the Element county which is not a total of Elements and it's municipalities that is just element county government. How much these municipalities and the county might have received under current law under the current distribution and without any sells tax expense expansion, the next version shows how much they may receive under the senate proposal so we have the distribution for articles 39, 40 and 42 which has simple mentioned everyone is levying that's the 2 cents, then if there're any other levied article, you'll see in this case there is nothing here elements is not levying article 45 or 46. If they were that would be added in to the subtotal next you have the potential additional under the senate plan. You'll recall that Sendy mentioned that the senate proposal, the senate budget gives the section of the authority to levy the additional half cent, except for a few municipalities that would already be kept out. That's [XX] you see there the ten million three hundred 98000 will be the additional they could levy assuming that the referendum passes in that county. [XX] that assumes that the referendum would pass? Yes! So this potential addition under the senate plan is the maximum potential that they might be able to levy Okay! It does assume that the for the projection purposes.  Okay! Assumes that the referendum has passed, of course they'll have to have a successful referendum to be able get this revenue.  Thank you.  Sure. and then finally the total and they also said that revenue is not shared with the municipalities that's why you only see it up in the green line, [xx] line. and then finally you've shown the total potential revenue which is a total of everything we've just gone through. What they are collecting under the two cents If they were levying any other articles which most of your counties are but aliments doesn't happen me and the potential additional revenue. Finally we've shown a comparison to what they might have gotten under current law.   [xx] change when we could have committee understands that, that 10 million is a tax increase, correct? Yes. Based on the assumption of the successful referendum, correct. And Mr. Chairman. Just a minute. Following up on [xx] half sent, is that correct? Make sure we'll be clear. Yes. so that's a half cent although as you know under a few of the counties are already cupped out under the Senate proposal, so Mecklenburg County it's already capped at two and half cents because they're already at two and half cents. Tharam and Orange are currently levying at two and three quarters and they're going further in, so now subject to the two and half cap but they can't go any higher so if we're t go back to those pages in this document you would see a zero under that potential additional otherwise it's a half sent Thank you. Thank you. Actually Mr. Chair, I believe I missed both slightly at the end otherwise it takes them up to 1/2 cent, so for your jurisdictions that are already levying a quarter and additional quarter stand, it would

show an additional quarter to get them up to two and a half cents. Okay, thank you. Pardon the interruption but [xx] you were clear. So who's next? Okay, I'm going to round up here with the last section of the bill so again if you're following along in the bill it's page 500 and these are the local sales tax options and these may look familiar much of these was in house bill 1224 last that ultimately did not pass but their are some changes so the way that it was similar to 1224 is that it authorizes a new local option sells tax of up to half a cent for education, it increases the authorization for a public transportation tax from a quarter cent to half cent for those 94 counties that currently have only a quarter cent authorization, and then it increases from a quarter cent to half cent, the current local option sales tax we have that is available for general purposes. So the idea here is that all counties would have the ability to go up to a half cent with among those three articles and a county could levy any combination of these up to a half cent with a cap of two and a half% with a referendum. The new aspect of this proposal that is different from last year is that counties could only enact to these in quarter cent increments. Now again, you have counties that are at different rates right now and if you're back on that, the chart that Cindy pointed out on page 2 of the hudnred county chart you can see in table two it shows you that we have 70 counties at 2% and there's actually so we've got 27 counties at two and a quarter and then Mecklenburg, Durham and Orange. I'm sorry Mecklenburg is it two and a half and then Durham and Orange are at two and three quarters. So depending where your county currently is if there are at 2% they could go up to two and half percent. If there already levying two and a quarter they could only be go up a quarter, Mecklenburg would be cupped out as well as Durham and Orange. So that's how that part works. And then the other thing to point out that with regards to two and a half percent cap this will impact four counties, Mecklenburg, Wake, Forsyth, and Guilford currently have the ability to go two and three quarters, but there not levying that maximum. So this bill would impact them in that way and that they would not be able to go up to two and three quarters, but it does as [xx] said grandfather [xx] since they are already at 2 3/4 and that is basically the local sales tax option piece and I think that covers all of the provisions. Thank you, Staff and start taking questions from members [xx] and order as we can so Representative Collins first. Representative Collins you're recognized I have a question I guess from Miss Canada, I'm looking at this modifying the local option sales tax I was looking at one of the county's I represent on page 57 and I think I understand at what you said. I'm looking at the very bottom, very bottom part to see how the final result would be, and I'm trying to figure out what the difference would be in my county if we don't pass in the additional sales tax and I think what I need to do is take that figure to the far right for Franklin county to $7371 milion and the subtract the number two over from it, 2 million and 26, is that correct? Will that give me what the result of this law change will be if we don't pass any addition sales tax? it's a good question and it's not particularly in the documents so I'm glad that you asked. So on page 27 Franklin County When I'm looking at the bottom block which is fiscal year 1920 and one think I can tell you pointed out that I should have pointed out to the room is as Cindy mention the proposal is based in over several years, so you see in the black block with white letters senate proposal, 40% for capital, 60 for point of collection, the next year is 55, 40, 70, 30 and so the year you're looking at is the 80, 20 just point that out for everyone. So I believe that what you're asking is if you were not to do an additional referendum, how much money do we think you might receive under this legislation. Again noting used a 3.5% growth rate in many places they're saying more than that. The number that you're looking for is under the subtotal, so 15 million for the county and then and you

compare that to if there was no distribution changes and no expansion in this tax we thank this will would be some where around 9.889 which is on the very left you see that [xx] is current law Okay any follow up Follow up What else looking at those what affect will this law have what change what difference will be based on this law would that not be the next of the last [xx] minus the the two million if we don't pass the bill said your question, if you're looking for the difference, it would be about 5.3 million so yes you would take the final which is the total change and then assuming you didn't do the referral and you talked out exactly that amount.  Just give the order that I have for I ask a question Rep. Goodman, Rep. Stam, Rep. [xx], Rep. Adams. Rep. Goodman, you're recognized Thank you Mr. Chair. I have a question relating to the adverting tax, 23 years ago supreme court justice if I ask a question how can you define pornography He said, I don't think I can define it, but I know it  when I see, it I think you can make the same comment about advertising, it's pretty clear that when you buying that in news paper they can add the sales tax to the bill, but advertising consist of all kinds of things, e-mail blast, people how they walk for example in front of stores, to walk around with signs saying, big sale going on. We used to buy for big billboards up at the local house, school, football stadium that we get school money and they put that up, people throw out the balls that games, or just so many different things that constitute advertising, how are you going to define it? How are you going to say what is taxable and what is not? Then  have it a follow up. Staff anyone? We'll take step at that one. You are correct that the way it is the bill now it is very broad, it would be all inclusive, and to define it would be a point of conference if you choose to go that way. Follow follow up. Follow up. The State of Florida did this, is there anybody may have some information staff, do you have any information about how that work out for them? I believe that sales tax and average tax in Florida was repealed shortly after it was enacted. Follow up. Recognized for follow up. Do you know why they decided repeal it, was it just not durable or was it just too complicated to implement, can you get us, or maybe there's somebody in the audience that might know something more about about it. There have been many articles written on that tags so I can't propose to tell the policy reasons burning forth, but many of the things you have been cited in articles over time as the reason for its repeal. Thank you [xx] did you have anybody in mind in the this I might know and. Andy Allan is with the Retail Merchants Association I think he may. Mr. Allan are you here in the audience? but will you mind commenting please approach the podium and state your name, and if you can help us with a little guidance on this question. thank you Mr. Chairman. I'm the present General Counsel of North Carolina Retail Merchants Association. In reference to Representative Goodman question, my understanding is that they did have a similar tax on advertising around the late 80's and it was repelled after about six months but they saw what they it was a tremendous drop in the amount of advertising  done in the state of Florida because, when you add it on the sales tax it became, you could not do as much advertising but, what ended up happening I think also, was with the drop in advertising has few people in the box and this mean you have a lower amount of sales tax collected as well ans so I think that governor Martinez did that in about six  months came back and repeal that tax. Thank you for your comments, Rep. Goodman. Rep. Stam. Yes on that Mark will level the bill shield from income tax to sales tax. There's somebody who if somebody calculate how much the shift is and second since we are for all federal tax payers as well the vast majority of people who [xx] you can only take the deduction for state income tax or sales tax, but not both. The vast majority who itemize would take it on income tax. Has anybody calculated how much the taxpayers as a whole for North Carolina would pay in extra taxes to the federal government by this shift from income tax to sales tax? And you can get back with me after if there's any calculation that can be done. Yes, staff. Mr. Art[sp?]

We would need to get back with you on that. First question of how much the shift is, can I follow-up? Yes. Do you have a figure on how much the shift is from income tax to sales tax in this bill, just a big figure? We have an overall, that overall one-pager. Mr. Art[sp?], is your microphone on? I'm not sure whether. Thank you, Sir. Thank you. We have the overall one-pager, but we don't have a specific number that could answer your question right now. We would have to follow-up with you. Thank you. Thank you. Representative Jitter. Last night I was reading the comments manifested to get better understanding of redistribution of well active prepared to this bill. My question action is, do you have to have a local activist to have tax to participate this because it seems like to me that if you are one of the counties and it is a big winner in this, which I didn't if a) For sending your local sales tax in 2019 is going to come from your population regardless of whether or not your county implements the tax or not won't be some counties be better of not taxing their own citizens at all and still receiving 80% based on population? Is there any they have to have a tax to participate in this new system. Yes, Sir, if you work in article 39, 40 and 42 all this statute are reading that the distribution is among the taxing counties. Thank you representative Dallars. Thank you Mr chairman in page one, we have what we talk as as growth rate indicated as inflation rate, [xx] pick one, which page one are you talking about it? I am sorry large document. The large package. Yeah. Page one, it tell us the inflation rate we've mentioned growth rate, is this the inflation rate that was anticipated in which of sales or is this a basic inflation rate? If the growth rate will be more accurate to be referred to that and note the inflation rate probably twice when you refer to that page. Follow gross rate of retail sales, correct? The gross rate of the sales pack space on the whole. So in other words, not just retail sales but anything that the sell packs would apply to. Thank you. Representative Szoka. Thank you. The first question I had was on the portion of the bill that deals with jading, I'm just reading through that, would the propose change that the senate have, in your opinion, would that prevent us from recruiting corporate headquarters? Them odd. Do you mean in terms of the percentages? Right, yes because it seems like it would skew away from those types of corporate headquarters, I mean sure so to the extend that they want to go to major market community or something like that, the maximum jading a word calculation would be depressed from the current range of 10% to 75% to 50%, that would be somehow offset by the decreased utility count diversion but the overall amount of money that could go to the company would be decreased. Okay, thank you and follow up with another question. Yes sir. In that some light reading over the liken and this bill, on page 478 of the actual bill, where it talks about broadcasters, this is all new language here wondering with advertising being taxed and all this other language in here, I mean, what's the effect that'll have on on broadcasters, is there a way to calculate that and 25 words [xx] away? It's on page 478, if you're following along, John. So what this does is change the way broadcasters calculate their sales factor is basically adopting a market-based sourcing concept, in other words,

they would determine the percentage of their sales that are in North Carolina based on the percentage of their audience that's located in North Carolina, and so you would take the resulting approximate percentage and use it to calculate the corporate income tax Representative Adams. Thank you, just a comment on that, it seems rather complicated domain, thank you for your answer. Before [xx] the next question do have a question on similar [xx] as I understand it this is determining who the customer are and so at each point customers are tired safely and customers accepts is that correct I'm sorry I'm not sure I understood your question, could you,  as the bill state to get some to the broadcast wishes subscribers so they have to calculate who the end user is or end viewer or listener whatever that viewer is that correct is based on the audience they do it I don't think this is report [xx] provides regulatory reports for senator [xx] based on the audience percentage of the audience in North Carolina which will be the end user. Thank you, next is Representative Steinburg[sp?]. Thank you Mr. Chairman. I can see we're a lot of the colleague managers at first blush we define these numbers say tilde rating if you will, but I'm looking at the the revenue impact on the counties if this quarter sent rather half sent two short standard referendum going from the voters and I'm also looking at the number of referendums over the last several years that have passed quarter sent[sp?] half a sent[sp?] and it's pretty close to zero. There maybe a few of this aren't very popular so I really I feel as though that this is not really representing a realistic picture considering the challenge of trying to get a referendum passed the numbers look good in paper but in reality getting there I think it's going to be extremely difficult for a number of this Counties that that's the first point I wanted to make and secondly there are a couple of Counties and I'm sure there's more I'm looking at [xx] and Dare. Dare I do not represent but it's my sister County so I kind of keep an eye out for. They're really getting crushed under the thing it's a very negative impact and I would think as we move along with this bill if we're going to do anything with this portion of it at all that there there have to be room for modification so that none of the counties are actually hurt thank you. Thank you sir  Representative [xx] Thank you Mr. Chairman. In following up on what representative Gider[sp?] said if you but I just wanted to confirm because it sort of looks a little different from perspective of say Mecklenburg county than to might to a number of other Counties. So if we go to page 89 and 90 of that chart. I would like to make sure I understand correctly the impact of this plan to take from each according to his ability and give to each according to his need, and so at the time.   Please be clear you're talk about redistribution correct. And I will say it's practiced by some local government officials to. So the guys who are producing according  to there ability or been asked a great deal is being asked of them. Because happens local level and now ideas here as well but on that last page if you. I'd like to ask if this understanding is correct of this chart as it depictsMecklenburg  County. Mecklenburg correct that the way to do that is to add all of the negative figures Mecklenburg County and its municipalities would be to add all the negative figures in the right-most column and that would give a total if I added it right is $17, 549, 843 in that fiscal year and then that negative impact would grow at whatever your assumption is for growth in the sales tax base over ensuing years. Is that a correct conclusion of what the data shows on the chart? Sure, to your first question if you wanted to know the total impact within what geographically is Mecklenburg County, Mecklenburg County

government and the governments of all the incorporated areas yes [xx] those numbers, we haven't shown a total per geographic county on these sheet so that would be, it looks right around 17 million and then I think your second question was if you wanted to go out in fiscal year 20/21, fiscal year 21/22 and calculate the impact what you just supplied the growth rate I think that that sounds right but one thing I said earlier and want to point out also here as well is that the change also includes the expansion to the base so that is included here as well so your base is growing at whatever rate with use to in half percent. The base expansion that we talked about earlier is also so you're growing at that rate and then you have the change, in this case a negative change from going to per capital from point of collection several factors all working together.  Representative Brawley, Chairman Brawley.  Thank you, Mr Chairman. in keeping with my reputation I have a series of questions. First, we've had a discussion. They're going market source for broadcast are market base sourcing also going to be applied to other distribution media such as internet sales do we know? Mr. [xx] Yeah, market based sourcing would apply to all of those industries. Follow up, so we are expecting to collect advertising sales taxes from websites in Europe? Mr. [xx] This will not be the broadcast of those supervisions are related to a portion of the corporate income tax, not sales tax. Okay, thank you. Speaking about sales tax more specifically, our prepared food taxes and occupancy taxes, these are normally referred to as tourism taxes are they subject to redistribution or do they will remain with the counties where they are currently collected? They would remain with the counties where they are currently collected. On the 43, the transit tax, which currently is collected in Orange, Durham and Macklenburg at a half cent all three counties. Is that going to be subject to the 8020 redistribution at the end of this cycle? No, the article 43 and the article 46 that quarter cent they would all remain with the county where they were collected and those taxes of course are not shared with the municipalities, those are county only taxes Thank you I was glad to see, by the way, that the plan doesn't encourage another tax increase in Mecklenburg, but for some folks I think it is I don't want to talk particularly about the judges charges the one he had said to problem so if I understand this correctly the major market communities are Mecklenburg and Brawlery  wmd the 50% max of the [xx] reduced by 15% diversion to the utility fund is that 15% of the total taxes after which the 50% is applied or is it 15% of the 50% [xx] it will be 15% of the 50%, so you will have the 50% as your maximum [xx] award calculation of the award that goes to the business, you'd have the percentage diversion to utility account. Okay, so that would actually that would be seven and a half percent reductions so you will actually be down to 42.5% would be the maximum the company would actually receive. that seems like its stuck [xx] but it seems right on the top of my head Then there is a requirement that the wage be 120% of the average prevailing of the county wage, not state wage, is that correct? Yes sir. And then if there is any one NC grants there will be $2 of local money for everyone at stake Yes sir, Okay. So I've heard WMD sometimes referred to as White American [xx] sometimes as weapon of mass destruction and with the 200 and it requires at least 200 net new job and 120% of county wages with 50% of the potential being usable

for an incentive reduced about 15% and $2 to every $1 local match. With all the first everything for last statement referred to JD. Okay know if I can also ask a little bit at the medical expense the way it works now you have a $20000 that capital that you want to go to housing expenses mortgage interest, appropriate tax in your housing and some delighted expenses there plus unlimited chairable deductions the house modified to so allow an unlimited medical deduction and then senate rolls everything together with the $20, 000 cap Mr Chairman that's correct okay so someone who is close to that already with their housing expenses and has a $40, 000 medical expense will not be able to debt most of that is a carry forward allowed on that or is that deductible only in the current year? Only in the current year there is no carry forward okay, thank you Mrs Chairman I think it's got all of them but although I will say with the sell tax I'm going to dispute slightly representative Bishop about take from each according to his ability and give to each according to his need I think it might be take from each according to his ability and give to each according to the political power of these elected. Okay, alright thanks sir, Mr. Chairman, Miss Clak follow up on that and finally give my mind around the broadcaster piece, and that new language has a consumer in my household of Netflix, Hulu, Amazon video services. How does that tax impact me as a consumer? How does it fall because there is broadcast and there's rights and there's, who determines who the customer is and where does that tax apply? I'll explaining to how it's currently a portion and then how it would change to under the statue. So you have a dollar of income that a company might have and it's multi state. You have to do a portion representatives to determine how much of that dollar is taxed in North Carolina. Under current law is based on cost of performance, typically based on costs of performance and and under this change it would go to market base sourcing. For a broadcaster, market base sourcing means your portion based on where the market place for the services is located, and so for broadcaster under these market-based associate against based on where the audience is located and that would be to understand that audience is in North Carolina that will be your point representative. Ok, Thank you Ok. Mr Chairman A follow up on the same then talking about is it possible. Yes, sir that's true. Yeah, please go ahead [xx] allow me.  Thank you. I have a, I really get confused about cap things on this broadcasting issue. One is, who is responsible for the tax if you have agencies that place all this or if you're part of an add or part of some TV add that list say Nationwide runs an add and since NSC Jobley and [xx] How do you determine who those were? and is maybe there's somebody in the audience from the broadcaster say they could speak on this as well. Is there anybody from broadcaster here? Yes, sir [xx] multiple players here. Please thanks again for the committee and to you representative Yes my name is William Nelson and I'm appearing today on behalf of the Motion Pictures Associations [xx]. Can you move a little closer to the mic [xx] it's hard to hear you. William Nelson on behalf of the Motion Pictures Association. Thanks You are recognized. Thank you. To explain a little bit about the way the audience factor works. You need to know a little bit about how broadcasters and I'm representing the national broadcasters earn their revenues. They earn revenues fro two sources, from selling advertising services and from licensing content to distributors of that content. Broadcasters create the content, they sell advertising services and they licence their programming, their customers are the advertisers and the distributors who pay them for the advertising services and for the right to re-transmit their programming the MPAA does not

object to market sourcing but we believe that the market sourcing rules that the state adapts should reflect our true market that is who our customers are Who pay us money, and who has direct relationship with us and those who be the advertisers, and the distributors and to the extend those customers are located in North Carolina, our income derived from them will be included in our sales factor, the audience factor method or reviewing audience method would require us to look through our customers to the viewing audience, who constitute customers of our customers, people who do not pay the broadcasters for anything, there are not customers of the broadcasters, and they have no direct contractual relationship with the broadcasters. So, we believe that the viewing audience method is an outdated method, the trend is clearly in the other direction in last 10 years no state legislature has adopted the viewing audience method. All the states that have considered how to apportion broadcast revenues or source broadcast revenues during this period have gone in another direction and I've looked at the location of the broadcasters customers. There are a number of states of that adapted viewing audience method decades ago before technology had broadcast industry but no state legislator has said has adapted this approach in the last 13 years exception would be to come [xx] which is something of an outlyer and adopted by administrative rule, not by legislative action thnk you honestly on top of [xx] there I know the rules of Hamalton has the question is there any other option on this topic members of the committee, [xx] Harmaton Thank you Mr. Chairman, just to start [xx]. What's the impact on the budget in terms of revenue collections for this change? You have your seat, we anticipated we have a neutral to a small positive impact on the budget we don't have the ability to quantify the impact the market base source specifically, follow up, then what's the point, It was a I think that's a rhetorical question but I would love to here your answer any way, representative Brown power from the same topic yes would this apply to political advertising, if it cuts down on advertising like I have heard it with you a lot of people might start supporting it is this the incumbent protection policy is that what you are, Mr. Tak may be helpful to distinguish when we are talking about the broadcaster these was about corporate income tax support management is not the same thing as the sales tax from advertising I think some may be getting those confused but we are talking about corporate income tax so therefore a company that might be a broadcaster this would determine how much of their income is subject to corporate tax in the state, Thank you, Rep. Blust you are recognized you had another question, the sales tax portion would that apply to political bash political advertising their is no exception for that in the bill it's very broad I'm worried that might get public support for this it cuts down the number of political I have got a question on the sales tax redistribution if I may understand this right all these data we were given this plan depends on 97 counties approving either a one or a two plus two a one fourth sales tax increase in a local referendum is that correct has any one run the numbers I would be interested in Guilford if the voters turned down these quote these sales tax referendum. The first the first two cents would be distributed. All county's are levied that, the distribution impacts those first two cents. The additional half cent which would be inactive in quarter cent increments. Some county's already have the quarter cent, some already have the half, Guilford is it two but the half cent, the additional half cent is a county only tax, it comes to the county based on point of collection. It is not part of the distribution formula in the bill so in the case of Guilford that it chose to enact a quarter cent at one point and and a quarter cent at a separate point we had the full two and half percent, the 2% would be redistributed 80 20 but the half cent would come to Guilford on a point of collection basis the reminder

to the committee we can go till ten o'clock since we're not voting and we have just for your notice that here we've representative. Brawley, Adams, Szoka, Reives, Stam, and we also have someone I think from the industry that was coming to the market following on the broadcast piece recognize you for time that does not exceed three minutes. We'd like to hear from you as well. Thank you very much Mr. Chairman. My name is Mark I'm a lawyer here in rally representing North Carolina Association of Broadcasters which consists of all the radio and television stations throughout our stay. There are in the discussion this morning there have been two discreet issues that have come up in the senate work. First the advertising tax which is a separate issue as stuff noted and also the corporate income tax market sourcing peace. Let me just make a quick comment about the corporate income tax market source piece because you have to understand that we're not a monolithic group we have moment and people turn AM they turn radio stations in small towns, we've got people operating television stations in Sholate and Rolise. So we cut We run the game of all source of folks we are involved in broadcasting and generally trying to figure out our audience I assume if we're going to go to this market sourcing approach and I'm not saying we favor it I think we are still trying to understand how it would facts the breaths of our membership, certainly the previous figure Mr. Nelson spoke to the FOX Cente operating stations affiliated with national groups, but Nielson who rates our audiences through their system for television and for radio, charges people a lot of money for that service and not everyone can afford it, and so if you try to base the corporate income tax for a small company, based on Nielsen Reports that they don't subscribe to, you all are going to buy those numbers and tell us what they are, and they're expensive, now maybe they give the government a better deal, but many, many, many of our members, do not subscribe to the rating services because of how expensive they are. So, I would just note, that with respect to that corporate income tax proposed change it's not quiet of simple as it may look on the face of it, and since you're considering and revenues there might be an expense component to implementing that changes that could be pretty large I have some television stations paying Nelson over a million bucks a year so I don't know what they charge the government maybe I will get better deal as to this advertising tax we're 4 square for thinking it's a bad idea and bad idea economics for the economy, and for consumers, and for small business who advertise on our stations. That proposition is an economic non starter. Every dollar of advertising yields 22 dollar of the economic activity you can imagine what the reverse would be if you put a depressive effect on economic activity by taxing advertising I guess 4.75 local option up to perhaps 7% in our largest counties we think that will hurt consumers because advertising is a cause that is baked into everything we buy, if you buy a car may be a thousand dollars of the cost of the car that is advertising the product to make consumers aware no what the price comparisons all things that they are advertising does and to increase it to tax itself and then tax the sale of the end product of service is what we call a double tax or a cascading tax, and so typically we would not look to tax business-business inputs like that. I know when we we're looking at tax reform two years ago in the proposal. I'm sorry to interrupt you, but you need to wrap up here Marshall [xx] I know in that proposal Mr. Chairman it was not proposed to tax advertising. So we think that would be a very unwise idea to do that because we think it would affect consumers as small business you know honestly, so thank you very much Thank you for your comment chairs is going to recognize representative Tain [xx] it is day I will recognize you since you are here and again reminding you all we will continue with discussion on Thursday as well because of time I don't think he has heard I think you come up to one or more sits so that we can here you for we know representative Don likes for

work I am sorry for that representative Tine thank you Mr chair I don't believe I have ever asked the speaker in any other committee but I don't think i have something that is important to my district as the sale tax readers distribution and I just like to make sure that as we go through this discussion we have a premises based on facts as opposed in and one of the thing that I keep hearing is that my particular county and representative Stam county is that the receivers of some devious plan that has existed on end. The truth of the matter is today their county gives $4.2 million to other counties. We give 15% of the two cents that we collect to other counties today. Before we change anything. This plan would give another 9 million plus, this is not including the towns by the way that each give another about a million dollars this will take us $. 9000 additional the two scientists representative Bob was talking about before or their half son won't even take us back to where we are today giving $4.2 million. So you know the thing is I just want to make sure that we're looking at this realistically and I have the facts from Department of Revenue about who gives what based on percentage of collected, and it's Mecklenburg, Currituck, Dare give the highest percentages. Dare at around 15% over the last three year 11% Currituck, about 11% Mecklenburg. We've given $80 million over the last 10 years their county has to the rest of the state and the one thing that I'd ask you, and the reason that we don't give the same 8 million that we were before is because our economy is not doing very well out on the outer banks. Our real has not recovered. So you're looking at a county that's not doing very well taking their funds and giving it back to the other areas what'd I'd ask you as representatives we look at the state. We have two counties that would do okay under this. One county that would do really well in one county would do really bad. But I can't destroy one county in my district to the benefit of three counties in my district two are opposed, two are for. It's not the right place. If we want to invest in rural communities, we do that through community college investment. We do that through we do the economic development and we don't do it through taking from the court vote that even though they don't and giving to those who don't so I appreciate very much Mr. Chair you allowed me to speak. Mr, thank you for being in the committee today, and we have time for one, two more, representative Brody have you next then representative Adams. Thank you Mr. Chairman I know there is a lot of the senate finance things were originally an H1-17 which was rolled in the budget and I just wanted to confirm that there is nothing in here about taping aviation tax in the state couriers. No sir. So under the senate plan they will be taxed from the first dollar to the last dollar they spend on aviation fuel? That currently form provision in the law and far as January first of 2016 and the senate doesn't continue that refund. So we have time for comment on that? Go ahead please. Here until this committee allow it. Okay, I take some aviation folks are here today and I will be interested in their comment on the park that will have on the airline industry in North Carolina particularly a hub and an located in Mathew's largest suburb is there anyone here from the aviation industry? I'm here, I may stand up sir. Pass the microphone set the microphone state your name and who you work for the committee, thank you good morning my name is Shone Williams I represent Airline for America we are the oldest and largest trade organization representing passenger and cargo carriers here in the United States, they're all names that you're familiar with, American United Delta, JetBlue SouthWest Hawaiian, Alaskan, UPS, Fedex and others. To answer your question this would not have a very positive impact whatsoever on our industry it would not have a positive impact on the Charlotte hub, nor would it have a positive impact on the smaller airports throughout the State Of North Carolina. Texas is example of the state that has no tax so ever and has three hubs in that state and, so we have been urging not only the

extension but actually a full exemption of aviation fuel from the sales tax base 35 other states do this right now. This is a business input, under a good tax policy would be appropriately exempted from the sales tax base and that's what we would be encouraging. Thank you Sir. Mr Boyd[sp?]. Thank you. Thank you Mr. Chairman? Representative Blust. Just a matter of scheduling, if the Senate's going to insist on this, has the Speaker given any consideration to some sort of Christmas break? Representative Blust, I will enjoy celebrating the holiday with you, I will [xx] later. We're and you bring up an excellent point, this is a major discussion we're fundamentaly hence forming if you will the economy on North Carolina, there are many pacts implication, the sessions here I must consider and we must consider on their behalf, so it is the intent of two senior chairs and the chair of this committee, that we give this a very, very thorough inspection and understanding, this is not something that should be, in my opinion should not be rushed through this legislature, if there are sound ideas on the strict proposals then we should take this up and look at those, if there are things that we disagree with on, we should wrestle[sp?] with those as as well. I know that today I have some, myself I have some major questions about how this impacts rural hospitals, hence Thursday we will be coming back to discuss impact on nonprofits in rural hospitals, so it's something that's important to me in my district. There are other, many other implications as Representative Tine has indicated and the rest of you have, so to that extent however long it takes we'll take that time to do that, and I think that's in our conversation as the senior chairs Mr. Speaker he understands that and I don't believe this committee from the discussion today is ready to move forward with anything, but to understand so thank you for that. We are at a time Representative Steinburg has promised me and look, he only has a minute and a half anyway, but he has one quick comment and then I have the list from today, also a reminder, when we come back on Thursday take all your materials with you and bring those back. Representative Steinburg. Yes, thank you Mr. Chairman. With your permission I would like to ask staff for the meeting on Thursday if they could have a chart prepared for us with the impact for the individual counties without the sales tax increase at one half% so they could do that I'd certainly appreciate, I think we all would. Is it possible? Is that possible staff? If we can have something for you, it may not be in the same format, maybe just in a table format but can update it. Great, great suggestion. Thank you With that in mind we will stand adjourned until Thursday. Thank you.