Tax plan falls apart after Perdue objects

"We're back to the drawing board," said Schorr Johnson, spokesman for Senate President Pro Tem Marc Basnight.

After weeks of stalled negotiations over a new state budget, lawmakers reached a breakthrough this week on a plan to raise $982 million in new revenue to help erase a projected $4.6 billion deficit.

The plan, which House and Senate Democrats approved on Wednesday, called for a temporary 1 percent increase in the state sales tax rate and a 2 percent income tax surcharge. The surcharge would apply only to income taxes still owed at the end of the year because individuals underpaid on their withholding or because businesses haven't paid enough when filing their estimated quarterly taxes.

Senators expressed reservations about the plan Wednesday because they never felt comfortable with either a sales tax or income tax increase. When Perdue expressed her concerns about the income tax surcharge to Basnight and House Speaker Joe Hackney, the Senate Democrats pulled out of the budget negotiations.

Perdue then publicly chastised lawmakers, saying she was "stunned" by the idea of an income tax surcharge.

"Who in the world thinks that, in these trying, challenging times for families, you can raise income taxes for working families, for middle-class families?" she told reporters in a hastily called news conference.

Perdue previously proposed a similar sales tax increase, as well as taxes on some services to raise as much as $1.6 million in additional revenue. She said the taxes are needed to avoid drastic cuts to education spending.

"I would like to see the General Assembly in Raleigh doing what they were elected to do. I'd like to see them coming to a consensus and not coming up with new options," she said. "The clock is ticking. Do the job you were elected to do and produce us a budget that protects the public schools and doesn't raise taxes on the middle class."

Lawmakers said coming to a new agreement won't be easy.

"We're going to be here for a while, for a long while probably," said Sen. David Hoyle, D-Gaston, one of the chief budget negotiators. "We're here for weeks, if not months."

Senators preferred to lower income and sales tax rates and raise revenue by adding taxes to dozens of services that have never been taxed, such as car repairs, lawn maintenance, manicures and appliance installation.

House members said they couldn't negotiate on a service-tax concept, meaning the Senate likely will draft and debate a bill spelling out how such taxes would work before returning to the budget negotiations.

"The Senate should have done this about two months ago – put their ideas on a piece of paper – but I'm glad they're going to start now," House Minority Leader Paul Stam said.

Senators said they planned to leave Raleigh Thursday night and likely wouldn't return to begin hammering out their plan until next Tuesday.

The state has been operating under a continuing resolution since the start of the fiscal year on July 1. The current stopgap measure, which expires on July 31, allows the governor and state agencies to spend no more than 84 percent of what was approved in last year's budget.