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Senate | February 10, 2015 | Committee Room | Finance Committee

Full MP3 Audio File

To the first finance committee meeting of the long session, I am joined by Senator Rabon and Senator Tillman, our cochairs of the Senate finance and we are excited about a lot of good things that'll happen this year. We got a, a very important time as far as getting our budget. The House is going to be going ahead and taking care of the budget this time, and then we'll fix it when it comes back. But first thing first, I'd like to recognize our Page, Brianna Yo. I think, am I pronouncing? Thank you. Welcome, appreciate you, hope you enjoy your, your stay here. And then we have our two members of the sergeant in arms, Steve McCade and Charles Meselles, both of which are very helpful with keeping this meeting in order and making sure it runs and actually allowing the microphone to work for me too. The, let's spend a minute since this is our first finance committee meeting and talk, have, some of our staff, Rodney, will everyone just identify themselves so that we can have the members recognize who we're working with this year? [SPEAKER CHANGES] Yes, sir. I'm Rodney Bezell with fiscal research. [SPEAKER CHANGES] Good morning. I'm Jonathan Tart, also with fiscal research. [SPEAKER CHANGES] And I'm Trina Griffon with the research division. [SPEAKER CHANGES] And I'm Cindy Avery with the research division. Amna's here too. She works with your fiscal research division. She'll be helping on one of, on this bill, although she won't be a regular for finance. [SPEAKER CHANGES] Okay. And then let's also, since we have a number of members that are either new to the general assembly or new to finance, would Senator McKissick, would you be kind enough to start the introducitons? Are you a member of this committee? Thank you. I'm excited about that, sir, I have to tell you. [SPEAKER CHANGES] Yeah, Senator McKissick, 20th senatorial district. [SPEAKER CHANGES] Tom McInnis, 25th district. [SPEAKER CHANGES] Tom is a new member to the general assembly. Welcome. [SPEAKER CHANGES] Brent Jackson, tenth district. [SPEAKER CHANGES] Ralph Hise, 47th district. [SPEAKER CHANGES] John Alexander, fifteenth district. [SPEAKER CHANGES] A new member, John, welcome. [SPEAKER CHANGES] Kathy Harrington, District 43. [SPEAKER CHANGES] Joel Ford, 38th district. [SPEAKER CHANGES] Warren Daniel, district 46, Burke and Cleveland. [SPEAKER CHANGES] Ben Clark, district 21. [SPEAKER CHANGES] Andrew Brock, 34th district. [SPEAKER CHANGES] Josh Stein, Senator 16 here in Wake County. [SPEAKER CHANGES] Jeff Tarte, district 41, Mecklenburg County. [SPEAKER CHANGES] Joyce Waddell, district 40. [SPEAKER CHANGES] Welcome, new member of the general assembly. [SPEAKER CHANGES] Andy Wells, 47th district, Catawba, Alexander. [SPEAKER CHANGES] Welcome to the Senate. We're delighted to have you as a new member of the finance committee. [SPEAKER CHANGES] David Curtis, 44th district. [SPEAKER CHANGES] Dan Blue, district 14, Wake County. [SPEAKER CHANGES] Terry Van Duyn, district 49, Buncombe County. [SPEAKER CHANGES] Harry Brown, sixth district, Onslow and Jones county. [SPEAKER CHANGES] Tom Apodaca, Henderson, Transylvania, South Buncombe, the best part of Buncombe. [SPEAKER CHANGES] Senator Tillman? [SPEAKER CHANGES] Mister chairman, Jerry Tillman, Randolph and Moore. Did, some of the audience don't know that Marsalles, raise your hand back there, played with the Cleveland Browns, and knocked out the great running back Jim Brown. How many of you knew that? Just me and Charles and couple of other. [SPEAKER CHANGES] Were they on the same team? [SPEAKER CHANGES] Yes they were, and he got fined, every dollar he had. They fined him $100. [SPEAKER CHANGES] Good morning, Bill Rabon, district eight. [SPEAKER CHANGES] And my name is Bob Rucho, and I'm district 39. [SPEAKER CHANGES] Where is district 39? [SPEAKER CHANGES] I'm sorry? It's in the county of Mecklenburg. Senator Barefoot, would you identify yourself here and, and. Okay. [SPEAKER CHANGES] Senator Barefoot, district 18. Wake County. [SPEAKER CHANGES] Senator Barefoot, welcome. Okay. Thank you everybody. We have two important issues today. Both of them are very time sensitive. If you haven't heard, the IRC update, there are a number of accountants and tax filers that want to get this information so that they can file their tax forms, and that is the first item. That's the one on there. And then I believe we're gonna have a PCS. Senator Rabon, would you give us a motion please. [SPEAKER CHANGES] So moved

We accept the PCS. [SPEAKER CHANGES] Okay, Senator Rabin is going to have a PCS which is in your folder which includes an issue of gas tax, so we have two important issues to take on today. Staff, any comments at this point. Okay, Senator Rabin, would you take on the first part of this bill? And he's going to explain the gas tax. Members of the committee and members in the audience, this is Senate Bill 20, IRC update, PCS, now including the gas tax provision. [SPEAKER CHANGES] Thank you Mr. Chairman and members. I will go through this quickly and then I will answer any questions if. [SPEAKER CHANGES] Yes. [SPEAKER CHANGES] If that's okay with you, Mr. Chairman. What we are doing in this bill is we're going to cut, freeze and stabilize the gas tax. That is our plan. This is mainly a bill that is just corrects things and this is why it is coming out when it is now and I will run through it for you very quickly. We immediately would like to, this bill will put a floor on the gas tax. It is a tax cut of 2.5 cents. The motor fuels tax was set at 37.5 cents January 1. This bill immediately lowers that tax to 35 cents. It also adjusts the formula by which we do this and it does that by setting the fixed rate at 17.5 cents, which it is now. It then either sets the, adjust the rate to an additional 17.5 cents, which brings us to 35, or it uses a factor of 9.9% of the average wholesale price of gasoline to set the tax. Okay, the other thing this bill does is it changes the date. We currently set the gas tax twice a year. This bill will set the gas tax as an annual reset on January 1 rather than resetting it twice a year, so we will go from March 1 to January 1 at 35 cents, then there will be an automatic reset which will probably be at 35 cents. That is the long and the short. There are adjustments that will have to be made to the budget because this tax cut will mean $33 million coming out of the current transportation budget, a little over $8 million will be from the Highway Trust Fund, the balance will be from the Highway Fund. The bill goes through where those cuts are to be made. You may have some questions about that and I will answer. I give you the broad stroke, bridges, contract resurfacing and system preservation have 0 cuts and no, my mistake, ferries have 0 cuts. Primary roads, secondary roads and cistern preservation have a 1% cut. The remainder of the cuts come from the Department and from the Highway fund, so that is the long and the short. Again, we're planning to cut and freeze, stabilize, get the volatility out of the motor fuels tax so that going forward the Department, the industry and the legislature can better forecast and budget the Department of Transportation. If I have left anything out or if there are questions, Mr. Chairman. [SPEAKER CHANGES] Okay, members of the committee? I've got Senator Blue. [SPEAKER CHANGES] Thank you, Mr. Chairman. Senator Rabin I, in listening to the three verbs that you use, cut, freeze and stabilize, given that the increased demand in fact seem to be overwhelming demand on the Highway Fund as well as the Trust Fund, why can't we just freeze and stabilize with this tax rather than cutting it? We could freeze it at its current level, leave this $33 million in transportation and therefore not have to back up on making bridges safe.

And these administrative cuts to the department as well as the secondary primary road cuts. [SPEAKER CHANGES] Well, that's a tough question to answer, Senator Blue, and it is well put. I would say that if we did that we might have difficulty in some or one of the chambers of passing such a bill and it is imperative that what we do get a floor and the stabilization to this highly volatile situation. [SPEAKER CHANGES] Okay, I've got Senator McKissick. You moved on me. [SPEAKER CHANGES] Yeah, I know, new seat. Alphabetical order. In any case, I like the part of the bill dealing with the stability. We certainly have a very volatile situation. We don't have a predictable income stream so I appreciate the need to establish that at $0.175. Now the 9.9%. I mean, I know that, you know, it's impossible to look in the future and come up with sometimes realistic financial projections but I assume that someone has set there and computed out what that might mean if prices go back up to where they've been historically, you know, over the last three years, sort of a blended average. Do you know what that impact might be if we went back in that direction? [SPEAKER CHANGES] In what you're, I am assuming that that 9.9, this is off the top of my head but I do have something that is close to that and we can ask fiscal if we need to go further. [SPEAKER CHANGES] Sure and physical might be the group that has the best answer, but if you can help that would be excellent. [SPEAKER CHANGES] And Miss Cameron has those and I will believe that if we will allow Miss Cameron to answer. [SPEAKER CHANGES] Yes, sir, and who is that again, Senator Rabin. [SPEAKER CHANGES] Miss Cameron. [SPEAKER CHANGES] Miss Cameron. Miss Cameron can you help enlighten us on the question from Senator McKissick? [SPEAKER CHANGES] Senator McKissick. Again, I'm Amni Cameron with the transportation team on fiscal research. Are you asking about the tax rates? [SPEAKER CHANGES] Well, it looks as if it's a guarantee of $0.175 or 9.9%, so that increase goes up to 9.9 I guess if that were to kick in. You know, whichever is greater. I was just wondering based upon projections. I assume some financial projections have been made based upon this new standard that would tell us what we might anticipate if the price of fuel goes back up to what it's been before we saw these rapid decreases because I don't think we can anticipate them staying there indefinitely. [SPEAKER CHANGES] I'm gonna give you a series of number. [SPEAKER CHANGES] Okay. [SPEAKER CHANGES] If you want to write it down. [SPEAKER CHANGES] And I'm sure I'll have a follow up, Mr. Chair. [SPEAKER CHANGES] Go ahead and I'm sure, can we provide this to all the committee members at some point, the information? [SPEAKER CHANGES] Yes. [SPEAKER CHANGES] Okay, move on. [SPEAKER CHANGES] In 2016, the consensus forecast rate that was completed in the last week shows that the motor hill tax rate will be an average combined rate in the next fiscal year of 30.4 cent per gallon. What I was saying was that in July the rate's not going to be 30.4, but the July plus the June, the July and January rate combined would be 30.4. In 2017 the forecast shows that rate at 31.3 cent per gallon, moving to 33.8 in 2018 and 34.2 in 2019. Moving on to the bill before view, those rates that start in 2016 at 35 cent per gallon. It's assumed that the rate will be below that, but the floor will kick in and bring it up. 2017, 36.4 cent per gallon. 2018, 40.5 cent per gallon. 2019, 41.0 cent per gallon. [SPEAKER CHANGES] Thank you, that's excellent. Follow up if I can. [SPEAKER CHANGES] Follow up question, Senator McKissick. [SPEAKER CHANGES] Sure, Senator Rabin, I noticed underneath the summary here that we have for the bill, it indicates in terms of reduction to the highway trust fund that one of the things that would occur it says by March 1, 2015, a reduction in force of 500 filled full time positions and a minimum

fifty vacant positions within a department. What impact have the folks at DOT indicated this particular reduction would mean in terms of the operations of the agency? [SPEAKER CHANGES] I think that it can be absorbed and absorbed very well. They're around thirteen thousand employees at DOT, that =we think this is a very reasonable number, and it is a way to balance this bill with the budget and not damage our bridges and contract re-servicing and the true job of DOT, which is roads and highways and byways of the state. [SPEAKER CHANGES] Quick follow-up, do we have anybody from DOT who's going to speak today? [SPEAKER CHANGES] Follow-up, Senator McKissick. [SPEAKER CHANGES] Do we have anybody from DOT who's going to speak on this today at all? [SPEAKER CHANGES] Is there anyone from DOT present today? [SPEAKER CHANGES] Mr. Lewis is in the audience. [SPEAKER CHANGES] Okay, Mr. Lewis, could you come up, identify yourself, just make sure you press the button. Alright. [SPEAKER CHANGES] Bobby Lewis, Chief of Staff NCDOT. [SPEAKER CHANGES] Alright, Senator McKissick, what is your question? [SPEAKER CHANGES] Just if the DOT has reviewed this particular provision dealing with the impact upon its staffing effective March 1, assuming this bill goes forward and are you in concurrence with Senator Rabin's assessment that it will have minimal impact upon the agency? [SPEAKER CHANGES] Can't hear that, just- [SPEAKER CHANGES] Is that better? [SPEAKER CHANGES] Yes sir, thank you. [SPEAKER CHANGES] I'm just a country boy, I'm not used to this technology. What I would say is, full disclosure, there has been some outsourcing requirements in terms of legislation that we have not put the best foots forward. So just with that, I think that would get us in compliance with current legislation. [SPEAKER CHANGES] Senator McKissick, okay, I mean, I"ll get with him later, I guess. [SPEAKER CHANGES] Okay, very good. [SPEAKER CHANGES] I think it's a good bill overall, I think decreasing this volatility makes a lot of sense. So I think we're headed in the right direction. [SPEAKER CHANGES] Thank you, Senator McKissick. Senator Ford. [SPEAKER CHANGES] Thank you, Mr. Chairman. I want some clarification, if you would allow, from staff. Section 2.2, Mr. Chairman, any time I see a piece of legislation that has Mecklenburg in it I get skiddish. [SPEAKER CHANGES] I can answer that. [SPEAKER CHANGES] Senator Rabin. [SPEAKER CHANGES] That is not changed, that is the law as it now stands. There is no lines underlined or nothing drawn through. Just as it is. This is the old law as a vehicle. [SPEAKER CHANGES] Thank you. You can understand where I'm coming from. You've got Senator Rucho chairing and Mecklenburg in the bill, so I just want to make sure, for the general public, that the- [SPEAKER CHANGES] Senator Ford, questions are good, speeches aren't. [SPEAKER CHANGES] And Senator Ford, I will say that I read this again this morning because I was contemplating ?? that question. [SPEAKER CHANGES] Okay. I got Senator Tillman. [SPEAKER CHANGES] Thank you, Mr. Chairman. I believe that we have asked DOT in the past on more than one occasion to make these cuts to the number of employees and I believe that, in all due respect, they drug their feet and didn't do it and now I heard what I thought, Senator McKissick, an answer you didn't like. If they could do this without a lot of harm at all? Thank you, Bobby. [SPEAKER CHANGES] Okay, any additional questions, members of the committee? Alright, seeing none, we're going to go into the second part of the bill. Senator Rabin, thank you. You did a great job. Senator Rabin will chair the meeting at this moment. [SPEAKER CHANGES] Thank you. At this time Senator Rucho is going to go over the IRC portion of the bill. Senator Rucho, you have the floor. [SPEAKER CHANGES] Thank you, sir. Members of the committee, if many of you might have been on revenue laws, we went through this, all of the portions of the IRC update. Problem that we face, and actually this year is a little better than in the previous years. When congress decides to make a change in the tax law, they wait until the very last point and the last time it was like the 18th or 20th of December, the previous time it was on the 31st. So it puts a lot of pressure on the general assembly to make decisions as to how were going to either couple or decouple with the different tax changes that have been promised and passed by congress. The other difference is that they don't have to worry about paying for things. They can just print money up there. So the bottom line is we do have to live within our means and that's something that is very important and part of our decision

Process, there are, let's see, one, two, three, six pieces of this IRC update. I'm gonna ask Jonathan Tarte in a moment to explain, I'll just say to you that in previously assemblies we've decoupled from every one of the portions that we will recommend a decoupling today. The revenue law study commission, I believe House unanimous, I think the Senate may have one dissenting vote, all endorsed this change. If you haven't heard yet, your accountants, your business owners are all screaming and yelling we need to know what the rules are. We are in the process now, this is gonna be a five day bill. We hope to get it through this committee, through Appropriations today at 1 o'clock, to the floor Wednesday and Thursday both, on its way to the House so that they can do that and so that one, the gas tax issue can be resolved. The issue of IRC is completely clarified and so under the circumstances we will work to get this through today, out of this committee and on to Appropriations. There is a cost of coupling with the IRC changes out of congress, which is about $73 million. That is a direct reduction, Senator Brown, on availability and as we've done in the past, and I mentioned earlier, every single one that we're decoupling we have decoupled in a previous session. Mr. Chairman, can we have Mr. Tarte explain going from the 179 on down as to what each of those means and talk about the recommendation from the Revenue Loss Study Commission. [SPEAKER CHANGES] Certainly, thank you, Sir. Mr. Tarte, would you please? [SPEAKER CHANGES] Sure. So we do start with Federal Income, so as your staff we go through and when we have Federal legislation we go through and we identify specific provisions that would have a significant impact on general fund revenues. Again, this legislation was passed at the end of the year and it's made retroactive to January 1, 2014, meaning it is fairly urgent that you pass this because it does affect tax returns that are currently being filed. So when we look through this legislation we identified those and I think I'll talk from the fiscal note that's in your packet. If everyone will flip through there you'll see the fiscal note that's for this bill, and the first item on there is enhanced section 179, expensing limits. This allows businesses an accelerated write offs of investments they make during the year. Instead of having to depreciate them over their useful lives they can, under the Federal law this was expanded to a ceiling of $500,000 in available deduction, so the cost of going to that expansion, without the expansion the limit is $250,000 a year, so this expansion would reduce General Fund revenues by about $52 million, this specific provision. If you turn over to the next page, we have one for qualified tuition and expenses deduction which is for the higher education deduction. If you conform to that one it would reduce revenues by $1 million. The next one is a deduction to allow mortgage insurance premiums to be deducted like mortgage interest. That one would reduce revenues by about $4 million. The fourth one is an income exclusion for discharge of residents indebtedness which would reduce revenues by approximately $14 million and then the last one on the bulleted list is an income exclusion for an IRA distribution to charity for a person who's reached 70.5 years of age. That one would reduce revenues by about $1 million. So these figures I've given you is the estimated cost on the General Fund if you were to simply update the date reference on the Internal Revenue code and adopt all of these for North Carolina purposes. This bill does not conform to any of those provisions and consequently under this bill you would not incur the cost to the General Fund. Now moving back to the front of the fiscal note, you'll see that on the top of there, there is a General Fund Revenue impact of $-1 million and that is because of conformity to one of the provisions which is the

...deduction for teacher classroom supplies of up to $250. And so, to sum it up, the total of all of these that I've talked about would be a 73 million dollar reduction on general fund revenues if you conform to all of them. But this bill again does not and only conforms to the teacher classroom deduction at a cost of 1 million dollars. [SPEAKER CHANGES] Mr. Chairman we'd entertain questions from the committee on each of these issues. Just identify them. [SPEAKER CHANGES] Certainly. [SPEAKER CHANGES] Verify which ones. [SPEAKER CHANGES] Certainly, Mr. Chairman. [SPEAKER CHANGES] Senator Blue. [SPEAKER CHANGES] Thank you, Mr. Chairman, just so that I'm clear on it: the federal policy was to institute these deductions to sort of help juice the economy a little bit. But in particularly I'm interested in the exclusion for discharge of qualified principle residence. Given that they were trying to bounce people back from some of the predatory lending practices and various other things that led us to the busting bubble in 2008 so do I understand this correctly: if you can negotiate with the mortgage company because you are upside down in a mortgage or you're basically gonna participate in a quick sale or something like that. Although the debt forgiveness is, say $50,000 on a $150,000 house, the debt forgiveness would be recognized at the federal level. You wouldn't have to pay income tax on say that $50,000 difference between what you owe and what they are willing to write-off. But we're gonna charge state income tax on that debt forgiveness from that mortgage company? Is that it? [SPEAKER CHANGES] Yes, that is correct. We coupled the last time and we will do so. We believe that this is a real dollar figure of 14 million dollars that will go against availability and under the circumstances the decision was made to decouple it. Secondly, there are a number of other areas that aren't offering the relief from income debt: credit cards and the like and what we feel is that we are at the end of the issue of home workouts through the plan that you are describing and we feel that this is the appropriate time as it was last time to stop that and not effect the availability of the budget at the level of 14 million dollars. [SPEAKER CHANGES] Just one follow-up. I know that staff has a number, that's how you're able to compute how much it would cost, a number of dollars, but do you have any rough estimate of the number of transactions that this would cover? That is, how many people or homeowners would be effected? [SPEAKER CHANGES] Mr. Stark? [SPEAKER CHANGES] Senator Blue, we did do some research on that. We've done this estimate a couple of ways: one was primarily using tax data and then we did it a second way, trying to rely on more on housing data and from our research into housing data we believe it is somewhere between 3500 and 4000 short sales that would be impacted. [SPEAKER CHANGES] Thank you. [SPEAKER CHANGES] Senator Blue, as you know, this just effects the state end of it. They're still are eligible for the federal side. [SPEAKER CHANGES] Senator Stein. [SPEAKER CHANGES] Comment on that and then a question on another subject. The real challenge with this debt relief is that we're making people come up with real cash to pay the state department of revenue. If you had a $100,000 debt write-off on a loan in Mecklenburg County where you were really underwater - that $100,000 write-off is totally on paper. It's just reducing the amount you owe the bank. You're not getting cash. So we're making them treat it as though it was income that they earned and now they have to pay real taxes to the state which, if it is 5%, that's $5000. That's cash that they don't have. That's the reason they are in financial problems in the first place. As you remember, Senator Rucho, I didn't like this provision last year and I think it remains problematic. My other question has to do with the higher education deduction when just saw Institute for Emerging Issues talking about innovation and the need, what distinguishes innovative places is having a high education work force and so we want to do everything we can to help people afford college and what this does is, as I understand it and please correct me if I'm wrong, is that it will end up taking away a deduction from middle-class families who send people to higher education, and if so, why did we do that?

Mr. Chairman. [SPEAKER CHANGES] Please. [SPEAKER CHANGES] The issue of $1 million in the scheme of things is not a lot of money but here's the point, if we couple with this it opens up the opportunity for the Federal Tax or, let's say, the recipient to either claim a credit or a deduction on the Federal side and if they do that, then that means that the state has to accept either the credit or the deduction and rather than $1 million, it means a $25 million hit against the availability so we just chose not to go into and complicate the tax system by decoupling. [SPEAKER CHANGES] And one follow up question? [SPEAKER CHANGES] Certainly, sir. [SPEAKER CHANGES] I know that we've decoupled from the Earned Income Tax Credit in the past. Just by the fact that it's not in this bill, does that mean we've coupled with it. [SPEAKER CHANGES] No, no, Mr. Chairman? [SPEAKER CHANGES] Please. [SPEAKER CHANGES] The Earned Income Tax Credit was removed the last time and it was replaced by a increase in what the standard deduction or what we like to call a zero bracket and that picked up some of that additional savings, but the Earned Income Tax Credit is no longer in our system. [SPEAKER CHANGES] Thank you. Senator Ford? [SPEAKER CHANGES] Mr. Chairman. Senator Rucho I've got a question for you. When is a tax cut not a good idea? [SPEAKER CHANGES] When is a tax cut not a good idea? I might have to ponder that for the remaining part of my life, Senator Ford. [SPEAKER CHANGES] You finally stumped him. Any further questions from the committee. Hearing none, as Senator Rucho mentioned earlier this is something that we need to move on with and so we will entertain a motion to accept the PCS for Senate Bill 20, unfavorable to the original bill and favorable to the PCS. Motion by Senator Tillman. Second by Senator Andrews. No more disussion or debate. All those in favor, please say aye. [SPEAKER CHANGES] Aye. [SPEAKER CHANGES] Opposed, no. Motion carried, Meeting adjourned. No, meeting is not adjourned. You got another one? [SPEAKER CHANGES] One, just, no, no more, Mr. Chairman, no more on that bill with Appleby, just a reminder for everyone that we, the Senate will be in Appropriations meeting at 1 o'clock in 544 to discuss these issues and then we'll be able to go to the floor with it. [SPEAKER CHANGES] Mr. Chairman? [SPEAKER CHANGES] Yes, sir, Senator Tillman. [SPEAKER CHANGES] I've got something that I failed to say a while ago. [SPEAKER CHANGES] Yes, sir. [SPEAKER CHANGES] I think this is important in lieu of our meeting just now. These three boys were outside in the playground bragging. One says my daddy's faster than you all's daddy, and he can shoot an arrow at the target and catch the arrow before it hits the target. The other little boy says my daddy's faster than that, he can shoot a 22 and catch the bullet before it hits the tree. The third little boy came up and said I got you all beat. My daddy works at DOT and he gets off at 5 o'clock and he's home at 4:30 every day. [SPEAKER CHANGES] Alright, if there are no other questions or comments from the committee? Now we can adjourn.