Senate Follows House, Approves Sales Tax Hike

The House passed the bill 58-54 Tuesday. Now that the bill has won approval in the N.C. General Assembly, it will head to Gov. Mike Easley for his consideration.

Easley likely will sign the bill into law.

The move will raise sales tax from 6.5 percent to 7 percent in districts that choose to impose the tax.

The state imposed its own half-cent tax increase in July -- the beginning of this fiscal year -- but that tax is slated to become null at the start of the next fiscal year, in July 2003.

The tax hike bill will allow many local governments to recoup money lost when Easley withheld $333 million in municipal funds last spring because of a state budget shortfall that at the time was nearing $1 billion.

Harley Duncan, executive director of the Federal Tax Administration, said there are some disadvantages to a sales tax hike.

"Sales taxes are sometimes considered regressive and influence (the) place of purchase," he said. "People living on the border will make their purchases in the state with the lowest sales tax."

Tennessee recently raised its sales tax from 6 percent to 7 percent.

Of the other states bordering North Carolina, Virginia has a 4.5 percent sales tax, South Carolina a 6 percent sales tax and Georgia a 7 percent sales tax.

But Duncan also said raising sales tax is often an effective way to raise state revenue.

"States raise a lot of money, and (sales tax) is fairly stable, unlike income taxes," he said.

Duncan said states initially place all tax money, including sales tax, in a general fund and then transfer the money to individual programs and departments.

Amounts vary from state to state, but Duncan said two-thirds of state tax money usually goes to fund education programs.

The Fiscal Research Department estimates that the N.C. General Assembly spends 60 percent to 62 percent of tax revenue -- including sales tax -- on education.

The legislature also delegates 20 to 25 percent to health and human services and 11 percent to justice and public safety.

Of the $14.3 billion budget passed Friday by the General Assembly, $8.3 billion will be allotted to fund educational programs.

Sen. Howard Lee, D-Orange, co-chairman of the Appropriations Committee, said he did not have any qualms about voting for the optional tax hike bill.

He said the bill will simply accelerate a plan already scheduled to take effect in July 2003.

Lee said the move will prevent the legislature and governor from impounding local money in the event of a future budget crisis.

Lee said, "It is the proper thing to do because the local governments need money sent directly to them."

The State & National Editor can be reached at stntdesk@unc.edu.