Tax Loopholes Could Be Closed To Raise Money

With a high unemployment rate and a declining economy, North Carolina's superior Triple-A bond rating could be in jeopardy.

By Matt Viser

City, State & National Editor

The budget clock is ticking louder by the second as legislators continue meeting this week in an effort to find ways to clear up a bleak revenue picture.

Most discussions have dealt with how much money can be generated and which sources of revenue will be used. Loophole closings, income-tax and sales-tax increases have all been on the table for discussion among N.C. House and Senate conference committee members.

Legislators realized earlier this week that the projected revenue growth they were using was too high. Originally, budget writers in both the House and the Senate estimated an overall revenue growth of 5.3 percent over the next year. But they realized this estimate was too generous, given a poor economy and high unemployment rate.

"As the economy has turned sour, we found our spending exceeded our revenue," said Rep. Warren Oldham, D-Forsyth, co-chairman of the House Conferees. The revenue growth projections have been scaled down to 4 percent. The decrease means $167 million less for budget writers to use.

Several adjustments will have to be made to make up for this change in revenue. "We've got to make more cuts or increase revenue," said Paul Luebke, D-Durham.

It appears as if a tax increase of some sort will be inevitable.

Although tax increases have not been favorable in the House, representatives have started to indicate they may be willing to accept some of the Senate's proposed tax-loophole closings.

Loopholes are areas of special interest where taxes can be increased. The Senate included nine loophole closings in their version of the budget, amounting to $190 million in revenue. The House removed all loophole closings from their budget proposal.

But legislation passed in the House Finance Committee Tuesday in a 19-14 vote, approving three of the Senate's nine tax-loophole closings. "This is an important bill because it's getting people to pay the taxes that are due," said Luebke, co-chairman of the House Finance Committee. The three loophole closings would raise $61 million in revenue.

Also being discussed among budget writers is an increase in the sales tax, which would be raised by a penny, generating an estimated $700 million over the next two years.

Local governments would be given more flexibility in implementing sales-tax increases. In response, the state would cut funding to local governments by about $300 million a year, with the money to be made up by the tax-revenue increase.

Representatives have also started talking about an income-tax increase over the next three years. "We need to consider a temporary income-tax raise that doesn't put a burden on low and middle income levels," Luebke said.

It is unclear, however, if any tax proposal will pass in the House. "A number of legislators are completely anti-tax of any sort," Luebke said. "It's really unclear of whether the tax will pass in the House."

Also at stake is the state's Triple-A superior bond rating, which allows North Carolina to receive low-interest loans. If the state does not have a solid balanced budget, their rating could drop. If the state falls to a Double-A rating, it could lose $300 million in higher interest loans.

"Our goal is to come up with a balanced budget and protect our Triple-A bond rating," Oldham said. "Each penny we spend, we have to project where we will get that revenue."

Legislators will likely have to pass another continuing resolution, with a budget expected to pass by the end of July. The fiscal year began on July 1, but budget writers passed a continuing resolution that would last until Monday. "I don't think there's any way we'll have the budget done by then," Luebke said.

Matt Viser can be reached

at viser@email.unc.edu.