House, Senate must agree

RALEIGH

Their marathon budget week now over, House Democrats soon must get to work again on crafting a compromise with their Senate counterparts over the right mix of spending cuts and higher taxes.

The negotiation clock started early yesterday when the state House gave final approval to its $18.6 billion budget for state government next year that would include taking in $784 million more taxes.

The bill passed on a largely party-line vote of 64-53 following a three-hour debate during a rare Friday-night session.

Democrats who drew up the House plan called it a balanced approach to deal with the state's worst fiscal situation in a generation: more than $2 billion in spending cuts, combined with the taxes and federal stimulus money.

"With the new revenues focused squarely on education and helping those who genuinely need our help, we have avoided the worst of the cuts," said House Speaker Joe Hackney, D-Orange.

The House tax package would raise the sales tax by a quarter-penny so that most residents would pay 7 percent. It would also add two new marginal income-tax rates for the wealthy and create or raise taxes on liquor, movies and digital downloads.

Passage of the House plan allows Democrats in the House and Senate to begin negotiating a final two-year spending plan in earnest in the coming week.

The Senate passed a budget bill in April. Senate Democrats are lobbying hard for their own tax package that would raise more revenues but change dramatically sales and income taxes and lower their rates.

Democratic Gov. Bev Perdue wants to have input on the bill, and wants it ready to sign before the new fiscal year begins July 1, but that deadline will be hard to meet.

"I'm expecting it to be a long process," said Rep. Mickey Michaux, D-Durham, the senior co-chairman of the House Appropriations Committee. "I'm hoping that it's not."

The competing House and Senate plans are far apart in sheer size.

That happened because the Senate drew up its proposal weeks before legislators were told that dwindling tax collections had deepened the budget hole by $1.5 billion.

House Democratic negotiators may have an advantage at the bargaining table since their proposal was based on the more realistic tax projections.

The outcome of the negotiations will depend largely on what level of additional taxes legislators believe they can bear politically and citizens can bear in their wallets.

Regardless, some cuts are more likely to take effect because they appear in both plans. They include:

□ Elimination of funding to pay salaries for 3,400-6,000 public schoolteachers as average class sizes are increased.

□ Elimination of an undetermined number of vacant and filled jobs within state government.

Remaining employees should expect no pay raises, and furloughs are possible.

□ Coverage reductions for Medicaid patients and frozen or decreased payments for doctors who treat them.

□ Closing of several prisons.

Michaux said that a key fight in negotiations may center on funding for the University of North Carolina system, which historically has had strong allies in the Senate.

Any tax increases carry political risks.

"A lot of folks in my area that contacted me, they couldn't afford additional taxes at this time," said Rep. Van Braxton of Lenoir County.

He is one of two Democrats who voted with the Republicans in opposing the House budget bill.

And raising income-tax rates that are already the highest in the southeastern U.S. may be a deal-breaker for legislators.

Some Democratic senators believe that such an increase would discourage companies from moving to the state.

The rate was raised temporarily in 2001 but didn't expire for six years.

"I'll never vote for that -- ever, never," Sen. David Hoyle, D-Gaston, one of the authors of the Senate tax plan, said recently. "It's just anticompetitive."

Republicans, who are in the minority in both chambers, have argued unsuccessfully that the state budget could be balanced without new taxes that they say would delay the economy's recovery.

"I am convinced there are hundreds of millions of dollars in cuts that wouldn't harm citizens," said Rep. Thom Tillis, R-Mecklenburg, who is the House minority whip.

Negotiations begin as more outside groups try to step up pressure on legislators.

Together NC, a coalition of more than 80 nonprofits and service providers, scheduled a Monday-evening rally outside the Legislative Building to urge legislators to consider more taxes.

The American Beverage Institute said it would run full-page ads in the state's two largest newspapers to oppose the House proposed 1.5 percent tax increase on liquor.

Legislators have already raised taxes on liquor within the past 10 years.

"Now they want to tax your drink even more to pay for their bloated budget," one ad reads. "Tell legislators it's time they cut spending, rather than taxing your cocktails."