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House | June 6, 2013 | Committee Room | Appropriations

Full MP3 Audio File

Members will take their seats. If all of the other visitors, if there are conversations, could you please take those outside the Committee Room? If I have everybody's attention, we'll get moving here. We're pleased to have with us today four Pages, and if you will raise your hand or stand up, I think you're over in this direction out there, Caitlin Sisson from Mecklenburg County, sponsored by Representative Jeter; Aaron Walker from Wade County, sponsored by Representative Murry; Sandy Goulsby from Hertford County, sponsored by Speaker Tillis; Yushawnda Hurst from Wade County, sponsored by Representative Stam. Thank you for being with us today. We have, as always, our expert sergeants at arms. Today with us is Carlton Adams, Young Bay, Bob Rossi, Joe Crook and Patrick Mason. So we appreciate them being with us this morning - this afternoon, really. You should have on your desk, I believe this is a revised PCS from yesterday, and Representative Cleveland moves that the House proposed Committee Substitute for House Bill 998 be before the Committee for discussion purposes only, without objection. No objection being heard, Representative David Lewis is welcome to the floor, the well of the Appropriations Committee to explain the bill. While he is coming forward, [SPEAKER CHANGES] Mister Chair. [SPEAKER CHANGES] I will say that for the purposes, if you could hold that though just a moment, for the purposes of the Appropriations Committee, all that we will be considering today in any amendments would have to relate to the the actual appropriations in the bill itself. So just the section that is being appropriated. Representative Stevens? [SPEAKER CHANGES] Just for a point of clarification, we've seemed to have heard back here that you said we were going to only consider this bill, are we actually going to vote it out? [SPEAKER CHANGES] It's the normal motion. It's the motion for the PCS to be in front of the Committee for discussion purposes. Sometimes you add the extra language, sometimes you don't. So it's a standard motion. The PCS is properly before us and Representative Lewis is recognized. [SPEAKER CHANGES] Thank you, Mister Chairman. Ladies and gentlemen, let me begin by saying to all of you, thank you for the hard work that you are doing to prepare our budget. I know it's been a lot of long days, and there are many more long days and nights ahead so please accept my sincere thanks for all of your hard work. House Bill 998 that you have before you, "The Tax Simplification and Reduction Act", is an important step in reforming North Carolina's outdated tax system. We're continuing to work, we have [?? started], and this plan puts North Carolina on track for further tax reform efforts in the future. This bill is a major step in the ongoing process of tax reform. Under the plan, the working families of North Carolina will see more dollars in their pocket and our state will become more competitive for job creation. So what's the bill do? All North Carolinians get a personal income tax break. It eliminates the three tax brackets that we have and establishes a fair, flat 5.9 percent rate. That tax is a lower rate than most all of our neighboring states. It helps low and middle income earners by doubling the size of their standard deductions. The most vulnerable North Carolinians will have an effective zero personal income tax rate. North Carolina will have one of the most generous standard deductions for blocks of income exempt from...

state taxation in the entire nation. This bill more than doubles the child tax credit for low and middle income families. It protects seniors and families by preserving existing exemptions from state taxation on food and drugs. It keeps a mortgage interest deduction along with a property tax deduction capped at a $25,000 maximum amount. It also allows for unlimited charitable contributions. Further, the bill cuts the franchise tax by over 10% and starts on a four-year path to reduce our corporate income tax. It does broaden the sales tax base, but it does so in a way that makes sense by asking only those who are already equipped and accustomed to collecting and remitting sales tax to do so on the services that they provide in so far as installation and delivery. With that Mr. Chairman, I’d be glad to go through the bill page by page. I do not think that is what you have asked me to do so, I will stand to follow your direction at this time. [SPEAKER CHANGES] We do have one amendment and we’ll take questions while that amendment is being passed out. Representative Michaux. [SPEAKER CHANGES] I’d like to ask Representative Lewis a question. [SPEAKER CHANGES] I yield Mr. Chairman. [SPEAKER CHANGES] Can you enumerate the services that the sales tax is going to apply to? [SPEAKER CHANGES] Yes sir I can, representative Michaux. Let me direct you - tell you what Representative Michaux, I’m just going to answer what you asked and then perhaps staff could direct you to the exact part in the bill. I apologize, I left my glasses on my desk in the chamber. I can’t read it so - I’m not sure those would help Craig but thank you. What this does in terms of expanding the sales tax base, Representative, is it would tax the sale of extended warranties and service contracts. As best we can tell, those are taxed now in nearly all other states. It would also tax the delivery and installation of tangible personal goods. What is that mean? It means if you were to go and buy a dishwasher today for your home, you would be charged the current state sales tax rate of - well if you bought it in Dunn you’d be charged 6.75%, if you bought it in Durham it be 7.5% but you would be taxed on that and then if that company that delivered it to your house had a fee for doing that, that is not currently taxed today. This bill would contemplate that that would in fact be taxed. The service to install it would be taxed. Another major change is that currently, when you go to have your automobile repaired or in my case, when you go to have your lawnmower repaired, the repair parts that are installed on your machine are taxed at the full rate but the labor to install those parts is not taxed today. It would be under this plan. There is also an expansion of the sales tax base in the area of amusements.

your past, your very distinguished past service here, that we had a hodge-podge, if you will, of the way that we taxed various events. This will set all those events to be taxed at the standard sales tax rates. I guess the easiest way to describe that would be the admission ticket that you might buy to go and see a movie this weekend. This bill does propose to end, or to repeal the energy star sales tax holiday. That would begin this year. And there is a strange little quirk in the law that certain vitamins that are bought from a chiropractor are not currently taxed. If you buy the exact same ones at GNC or Wal-Mart or even at a doctor’s office, they would be taxed at the full rate, so that is part of the clean-up language that we have in the bill. [SPEAKER CHANGES] A follow up. [SPEAKER CHANGES] Yes. Let me try to get a little bit more specific. Can you tell me about drugs, about food, and there’s one other one I had on my mind a minute ago, before you got on that litany, but I’ll think of it in a minute. But food and drugs, oh and, if you could tell me about that it will come to me in a minute. [SPEAKER CHANGES] Representative, thank you for that. This bill keeps the vital exemptions on sales tax for food and for drugs. [SPEAKER CHANGES] Representative Gill. [SPEAKER CHANGES] Thank you, Mr. Chairman. I wanted to just ask one question, and it’s on page 15, section 4.2e, that talks about elementary and secondary school athletic contests, dances and other amusement. Could anyone expound on that? Is this the regular little inter-mural games that they play at school, the contest within the county, and why would we include this, and how much money would it generate. [SPEAKER CHANGES] Mr. Chairman, I believe the lady asked about page 15. Is that right, ma’am? [SPEAKER CHANGES] Page 15, line 23, if you want to be- [SPEAKER CHANGES] Mr. Chairman, could I direct that to staff? [SPEAKER CHANGES] Which staff member? [SPEAKER CHANGES] Miss Avery. [SPEAKER CHANGES] Miss Avery is recognized to respond. [SPEAKER CHANGES] Representative Gill, those are the exemptions. Right now we have a tax on different forms of amusements, we have a gross receipts tax on them. And in that gross receipts tax statute, there are some 13 or 14 exemptions. This bill preserves all of the current exemptions, and that high school is one of them. So those are the things that would not be taxed, that are listed on page 15. [SPEAKER CHANGES] Further questions? If not, I move the amendment- it will come back- Representative Torbett, you've got a question. [SPEAKER CHANGES] Thank you. A question of the bill sponsor, Mr. Chairman. [SPEAKER CHANGES] Representative… [SPEAKER CHANGES] I’ll be glad to yield, Mr. Chairman. I apologize. I don’t see where the Representative… [SPEAKER CHANGES] I’m sorry, over here to your right. That’s fine. Page 13, “Creation of Fund, Administration.” It looks like we’re removing part of that from a public school building capital fund. If so, what kind of impact, monetarily, is that on to what they currently have access with the fund. [SPEAKER CHANGES] Thank you, so much for that inquiry, sir. The answer to that is none. The public school capital building fund, this portion of their income has not been included in any budget or distributed to the locals since 2008. This bill just

Just take the steps to repeal that. [SPEAKER CHANGE] Representative Presnell. [SPEAKER CHANGE] Social Security is still exempted? [SPEAKER CHANGE] Yes, Mame. [SPEAKER CHANGE] Any further questions before we address the amendment? Representative Harrison. [SPEAKER CHANGE] I'm sorry, I arrived just a few minutes late, you may have described this. But, I'm just wondering is there anywhere in this tax reform proposal that you take into account transactions on CraigsList? [SPEAKER CHANGE] No, Mame. [SPEAKER CHANGE] Mr. Chairman? [SPEAKER CHANGE] Representative Stan, do you wish to answer that question? [SPEAKER CHANGE] Oh, no. I have another question. [SPEAKER CHANGE] Okay. All right. [SPEAKER CHANGE] Representative Hall. [SPEAKER CHANGE] Thank you, Mr. Chairman. Quick question on the increase in the tax on an electricity and how that is distributed and then, a follow up question. I'll wait for that answer and then a follow up. [SPEAKER CHANGE] Thank you, representative. Currently the tax on electricity currently has two parts. It consists of the franchise tax, which is about 3.22% and then, it consists of a state sales tax part. What this bill does, the repeal 3.22% and then, place electricity into the state sales tax base. We did provide language in the bill after consultation with Duke Energy. We did provide language in the bill that would provide for expedited review of this by the utilities commission, because Duke says, they can lower the effective rate, that they charge. Because, the hidden franchise tax has been removed. [SPEAKER CHANGE] Representative Stan, do you need to be recognized? [SPEAKER CHANGE] Yes. Quick question. On page 15 and 16, section 4.2C, did understand that that's a list of the exemptions from the sales tax or is that new taxes? [SPEAKER CHANGE] Representative Stan, thank you for that. These are 12 items, that through the years the general assembly has passed bills to exempt from sales tax. This bill would just maintain that those events would remain exempt. [SPEAKER CHANGE] Representative Jackson. [SPEAKER CHANGE] Thank you, Mr. Chairman. Question for the bill sponsor, and I know this is getting confusing. But, it appears that the PCS allows for an unlimited deduction for a voluntary charity giving, but would limit a deductions for mandatory things, such as property taxed $25,000, is that correct? [SPEAKER CHANGE] Thank you, for that inquiry, representative. You are correct. Charitable contributions would not be capped in this bill. This bill would allow for mortgage and interest deductions, and specifically to address what you asked about property tax is paid on your home to be combined and to be deducted from the amount that you will be taxed at. We did cap that at $25,000, because based on the research that we've done that accounts for certainly over 97% of the folks, in the state who pay these bills. [SPEAKER CHANGE] Representative McNeill. [SPEAKER CHANGE] Thank you. Representative Lewis. [SPEAKER CHANGE] I'm right here. I see you got your glasses now. [SPEAKER CHANGE] All right. All right. I appreciate it. You and I had a conversation yesterday about the tax on the service plan and how it affected, maybe the parts and the labors on that, and whether it was actually a double tax.

...appreciate you that. But I'd like a little bit more clarification, if I could, from you or the staff on how their taxing a service plan and how that works. Maybe if when a person goes to get their car fixed if the service plan doesn't cover all the cost. Because some of the service plans have deductibles and sometimes when you go to get it, the cost is not 100% covered. I just wanted a little clarification on maybe how the law would work in that case. [SPEAKER CHANGES] Mr. Chairman, could I request that Ms. Averitt reply to that? [SPEAKER CHANGES] Ms. Averitt is recognized. [SPEAKER CHANGES] Yes, sir. On page 19, beginning on line 41, you'll see another sales tax exemption for the items and service that is used to fulfill a service contract to the extent the purchaser did not have to pay for it. So those, with the thought that those were currently, anything the purchaser receive free of charge, the purchaser had already paid for when it purchased that service contract. If there is some part that was charged at the time, then that part would be subject to tax. [SPEAKER CHANGES] Follow up? OK. So what was covered under the service contract would not be charged again, but if they had an additional charge, they would pay sales tax on that? [SPEAKER CHANGES] Yes, sir. [SPEAKER CHANGES] All right. Thank you. Representative Michaux. [SPEAKER CHANGES] I thought of my other questions. Representative Lewis, on the charitable gifts and the mortgage interest, is that applicable both to personal and corporate mortgage and interest payments? [SPEAKER CHANGES] No, sir. Representative, this would apply only to individual tax payers. As you know, if you own real estate through a commercial entity the interest that you would pay is a business expense that would flow through to the bottom line. [SPEAKER CHANGES] Follow up, Mr. Chairman. [SPEAKER CHANGES] Follow up. [SPEAKER CHANGES] So let me be clear, I understand that that's what it is, so individuals cannot take their full deduction, but businesses can take the full deduction? [SPEAKER CHANGES] Well, sir... [SPEAKER CHANGES] Because of the fact that it's a business item? [SPEAKER CHANGES] To be clear, sir, most every individual can take their full deduction. We'd be glad, at the Chair's discretion, to go through how big an individual mortgage can be before they would be hurt by this cap. But I can assure you that it is a very, very small percent. [SPEAKER CHANGES] Representative Starnes. [SPEAKER CHANGES] Thank you, Mr. Chairman. I'm over here, Representative Lewis. [SPEAKER CHANGES] Not used to you being on my left, Representative Starnes. [SPEAKER CHANGES] Yes, sir. I'm very comfortable over here. My question is on page 17 regarding the way that the franchise tax on electricity is converted to a sales tax and then remitted to the municipalities. And I know the goal is to make sure that the municipalities were held harmless and I'm sure that you've done the best to your ability to do that. I'm just not clear as to, explain how the ad valorem tax rate of a town figures into the equation. [SPEAKER CHANGES] Mr. Chairman? Could I direct that to Ms. Averitt, as well? She might be able to do it a little more concisely than I have. [SPEAKER CHANGES] I'm sorry, Ms. Averitt is recognized. [SPEAKER CHANGES] Representative Starnes, the bill provides that, what we did was we calculated about how much of the sales tax proceeds the local governments currently receive. To make an analysis, and that's about 44%. So what this says is that 44% of the sales tax revenues received will be distributed to the cities. That allows for it to go up or down. Then that transfer consists of two parts. The first part is what those cities received the last time they received the gross receipts franchise tax. So that's a determined amount and they get that. But then, say, there's some left over. How do you distribute what's left over because of growth and what seemed to be the best proxy was the property tax value in that city. As we looked...

looked at it, staff trying to figure out what was the most analogous. So that's just to determine if there's any money left from the direct part what was most closely analogous to something we could fix, and that was the property tax value, because that would include the business property etc.. [SPEAKER CHANGES] Follow-up, one follow-up then, well then when they, use that ??? tax rate to determine how the excess is distributed, which municipality benefits? The one with the high tax rate or the low tax rate? [SPEAKER CHANGES] It's based on the value, not the tax rate. It's based on the ??? tax value determined. [SPEAKER CHANGES] So it has nothing to do with the tax rate, just simply the value? [SPEAKER CHANGES] Yes sir, that is correct. [SPEAKER CHANGES] Thank you. Thank you. [SPEAKER CHANGES] Further questions before we go to the amendment? [SPEAKER CHANGES] I've got one moment. [SPEAKER CHANGES] Representative Michaux. [SPEAKER CHANGES] What's, what's after the adjustments that you've made on this, what's the total cost on here and this? As it now stands? [SPEAKER CHANGES] I know what it better be. Or under, or less. [SPEAKER CHANGES] Representative Michaux, the response to that is, if you include the repeal of the estate tax, which we contemplate the Senate will pass, the first-year impact from what the consensus revenue would have been to what it becomes is $40.2 million, and over a four-year period the savings is currently contemplated at about $1.6 billion. [SPEAKER CHANGES] Further questions? Follow up? [SPEAKER CHANGES] Mr. Chairman, I understood yesterday that when you pulled out the charitable contributions, the Howard amendment, for better words for it, that that figure would be about $1.5 billion over a 5-year period, and this one is now $1.6 billion over a 5-year period? [SPEAKER CHANGES] Representative Michaux, the largest change in this bill is actually found on page 1 starting at lines 35 and 36. What this bill would propose to do, as you recall 2 years ago, this general assembly passed a bill that allowed the first $50,000 worth of pass-through income to not be taxed, to be taxed at 0%. When, and as a part of the legislative process, we have proposed to sunset that this year. And that allows us to make the projections that you have before you. [SPEAKER CHANGES] Just a statement, Mr. Chairman, I'm still, pardon can I? Mr. Chairman. [SPEAKER CHANGES] The gentleman is recognized. [SPEAKER CHANGES] Thank you, sir. I'm still puzzled as to why we could not still, I'm looking at the 1.5 and the 1.6 billion dollars that you now are talking about, and I'm wondering why you were just, at first we started out with the billion, and then when the Howard Amendment got in, it got to 1.5 billion, now, we have taken the Howard Amendment out, and it's now up to 1.6 billion, and I guess, I guess, I'm a little bit perturbed as to what all the hullabaloo was about this part as far as the Howard Amendment was concerned. [SPEAKER CHANGES] If I might add, sometimes you'd be careful of what you read in the papers, Representative Lewis is recognized. [SPEAKER CHANGES] Just to be clear sir, the

Change was that the amendment that was sent forth in Finance would have had a 5025 million dollar impact on this current budget year. And we have that after consultation or perhaps lecturing might be a better way to describe the conversation with the Appropriation Chairs. It was said that was too big of a jump to take in one year. But we had contemplated that credit expiring in 2014 anyway and so it does. [SPEAKER CHANGES] Representative Stevens. [SPEAKER CHANGES] Thank you, Mr. Chair. I wanted to try to answer one of Representative Michaux’s question about mortgages. Because mortgages vary in terms of who this might impact, but we looked at the first impact that it would have on somebody with a $417,000 mortgage. If they were paying 6% interest, would lose $20 of their interest deduction. So I hope that helps you but everybody’s mortgage will vary but ti took getting to that number at that percentage point before a homeowner would suffer not being able to carry some interest. [SPEAKER CHANGES] Representative Hollo. [SPEAKER CHANGES] Thank you, Mr. Chair. Question for the bill sponsor. I’m looking at the effective dates, and can give you me, I guess a summary of the effective date of the income tax decreases because I believe it has to tie in with the calendar year and I believe some of the other dates and where the other tax rights are going to change maybe July 1, 2014. So am I correct in thinking that the actual income tax breaks are going to begin in the next calendar year? Because it says it will become effective when it becomes law at the bottom there. [SPEAKER CHANGES] Yes sir, the transition to the fixed flat rate would begin January 1st, 2014. [SPEAKER CHANGES] Further questions before we address the amendment? Representation ve Hall? [SPEAKER CHANGES] Thank you Mr. Chairman. And really a two point question. The first one being, with the flat tax that is now being implemented for all citizens, what is the tax cut if any to folks currently paying the lowest rate? [SPEAKER CHANGES] Well, Representative Hall, I appreciate that. You’ve got to understand that this bill provides exempt blocks of income that are taxed. And so, if you want to take a let’s say a married filing jointly, if they currently make $12,000 or less they wouldn’t be taxed at all. So their rate would be zero. If they make $24,000 their rate would be somewhere in the neighborhood of 2.8. Because we’ve got to remember that to help the lower-income folks we do have, unlike the current law which taxes from the first dollar earned in the state, we now have lots of income that are taxed at 0%. [SPEAKER CHANGES] Representative Baskerville. Excuse me, Representative Faircloth. [SPEAKER CHANGES] Thank you, Mr. Chairman. Question for the sponsor. Did you do some calculations regarding the sum set of $150,000 deduction for ?? income for say small business owners that have an income out of that of $100,000 or so. Can you give me some idea of what the difference would be? [SPEAKER CHANGES] Candidly, Representative I don’t know exactly what the impact would be. Let me just reply this way. Part of the reason that the $50,000 exemption was put into place was that North Carolina has had and currently has the highest marginal tax rates in the southeast. 7.5

[SPEAKER] A Percent. So with the cut from 7.75 down to 5.9, we think that there will not be a big impact, if you will, on the folks that do receive, pass through the entity income. But I don’t know quite what that exact amount is yet. [SPEAKER CHANGES] Representative Baskerville. [SPEAKER CHANGES] Faircloth will answer the question. [SPEAKER CHANGES] Representative Insko. [SPEAKER CHANGES] Thank you, Mr. Chairman. I would like to follow up on Representative Michaux’s questions about the 1.6 billion specifically. Is there, and I, maybe you need do answer, I know this is pretty complexed but is there some way that we can get a chart that will show where that came from? We had an original bill that took $1 billion out of our revenue stream. When Representative Howard’s amendment passed, it took an additional $500 million out of our revenue stream. So you put that back in but you must have taken out enough else to take out $600 billion. [SPEAKER CHANGES] There is a chart at the back of the bill. It’s attached to the back of the bill, and Representative Lewis, if you want to make any particular comment on that? [SPEAKER CHANGES] Representative Insko, all I would do is, and I was doing math on the fly here when I got asked about that by the gentleman from Durham. But please just look at the chart. And what you’ll see is that this revenue plan does contemplate growth. I wish I could stand here and tell you that I was proposing a grand tax cut. That’s everyone who runs for office on my sides dream to be able to do. What this bill does though is slow the rate of growth of income into the State but still provides enough income to meet essential state needs. So, I would contend to you that, to say that it is a cut is correct in that it is a cut in the rate that the revenue would have grown. [SPEAKER CHANGES] Follow up. [SPEAKER CHANGES] Follow up. [SPEAKER CHANGES] And I thought I, I intended to say that it would reduce our revenue, which it does. If I said it was cut in the total revenue, I was mistaken. That was misspeaking. Can you tell me, maybe another question would be, should I make the assumption that the original billion is the same and what’s changed is in that additional $600 million or were there changes throughout? And probably . . . [SPEAKER CHANGES] No, I think that’s very, very fair thing to ask. I think what you see, it is the earlier sunset of the $50,000 or business income method out against expansion, if you will of the charitable contribution deduction. [SPEAKER CHANGES] Representative Blackwell. [SPEAKER CHANGES] Thank you, Mr. Chairman. I wanted to follow up perhaps on the question that I understood Representative Hall to ask regarding what a low income individual might pay under this legislation versus what they are currently paying and by asking you if I’m understanding this correctly. Currently, let us say if we were talking about a single parent who qualified as a head of household. In looking at the current rates that are set out on page two, it appears to me that before allowing for them taking any deductions that they might otherwise be entitled to, that as I think you said, Representative Lewis, beginning with the first dollar of income up to $17,000 they would, let’s see, yeah. Up to $17,000 they would pay six percent income tax on that.

Am I correct so far? [SPEAKER CHANGES] Yes sir. [SPEAKER CHANGES] Under the new proposal for that same single parent who qualifies as head of household $9,600 at a minimum, but maybe more, itemize their deductions will get them a higher amount would be tax free and whatever their taxed on over that amount is going to be five point nine percent; less than what their currently paying plus the increase in the amount of not subject to first dollar tax. Is that correct? [SPEAKER CHANGES] Yes sir. [SPEAKER CHANGES] Representative Harris [SPEAKER CHANGES] Thank you Mister Chair. Representative Lewis I opening any conference of text the state undertakes including closing a lot of the loopholes. I understand, if my thinking is right, list at the back of the bill are the proposed eliminations of exemptions that reference EnergyStar tax repeal and the chiropractor nutritional supplements plus the list of the current exemptions and loopholes that we have in our tax code that are going to be eliminated, is that right? [SPEAKER CHANGES] Yes ma'am. [SPEAKER CHANGES] Okay. It would be helpful to put this in context if the staff has handy a list of all the exemptions. I know that they cost our state millions of millions, if not billions, in lost revenue. Everything from the bank exemption, there's the farm sales between equipment, and lucutary yhates. I would be interested, if it's possible, to see a list of those exemptions. Thank you. [SPEAKER CHANGES] Further questions Representative ?? [SPEAKER CHANGES] Representative Dollars, are you going to take comments too? I don't have any other questions but I would like to make a comment too. [SPEAKER CHANGES] Yes. Your recognized. [SPEAKER CHANGES] Representative Louis mentioned that this, even though we were removing, 1.6 billion dollars from our revenue stream it left an adequate amount for our essential services. And I know that our budgets for us this year