ATLANTA -- North Carolina's Senate Finance Committee yesterday moved to plug the state's estimated $1.2 billion budget gap in fiscal 1992 by approving a plan to increase taxes by $610 million and cut spending by $600 million.

The committee's action -- which is expected to receive final approval by the full Senate today -- followed endorsement of a similar plan by the full House last Friday that would raise taxes by $700 million and cut spending by $530 million. After Senate approval of the finance committee's proposal, the House and Senate will reconcle their versions.

That process, which could take a week, is virtually certain to result in what would be the larges tax increases and spending cutbacks in state history.

At the center of both the House and Senate plans is an increase in the state's sales tax to 6% from 5%, raising about $450 million in annual revenues.

The Senate bill increases the corporate tax by 1.25%, to 8.25%, for a period of two years, while the House would raise it to 8% with no time limit. Representatives would raise the cigarette tax to seven cents from two cents a pack, and the Senate plan calls for a three-cent increase.

A one percentage point increase in the corporate tax would bring in about $80 million annually and each cent-per-pack rise in the cigarette tax would net about $6 million a year.

The senators, however, declined to raise taxes in a number of areas that would be tapped by the House. In particular, the House bill would raise the personal income tax to 8% from 7% for residents with adjusted incomes exceeding $100,000. The House bill would also end many tax exemptions, imposing for the first time in North Carolina levies on boats, airplanes, trains, and some machinery.

The legislative action comes just a month after North Carolina officials doubled their estimate of the 1991 fiscal year shortfall to $729 million and the 1992 shortfall to over $1 billion. That announcement had triggered a call from Gov. James G. Martin for steep cuts and heightened concern at the rating agencies about the viability of the state's triple-A rating.

"It seems pretty certain that a plan to raise taxes and cut spending will be worked out," said Bob High, depty treasurer and secretary to the North Carolina Local Government Commission, which oversees all debt sold in the state. "Both sides are in agreement on the big items."

Mr. High said he is pleased that the legislature's budget proposals would apparently not result in a cut in state aid to local governments. Gov. Martin in January had called for a $242 million cut in state aid to local governments in return for allowing local governments to impose a one-half cent local option sales tax.

Officials at the ratings agencies said they were encouraged that the state lawmakers are nearing completion of a plan to solve its budget imbalance.

"It is an encouraging sign that the state is working to find revenues to support spending proposals," George Leung, managing director of state ratings at Moody's Investors Service, said yesterday. "We encourage long-term solutions that achieve proper balance between the two."

"The legislature seems to be on the verge of passing a budget that would make permanent revenue increases, and that mitigates some of our concerns," said Kathleen Quail, an assistant vice president at Standard & Poor's Corp. "But we will still maintain our negative outlook on North Carolina until we are convinced that the state has a comprehensive program to encourage long-term growth."

In his state of the state message in January, Gov. Martin proposed a $7.6 billion budget for fiscal 1992 that would impose spending cuts and a sales tax increase. The fiscal 1992 budget assumed growth of 3.1%, the 1993 budget growth of 7.5%.

City and county officials in the Tar Heel state have resisted Gov. Martin's blueprint for fiscal recovery, objecting to his plan to slash $242 million in aid to local governments in return for a one-half cent local option sales tax.

Nancy Precair, spokeswoman for Gov. Martin, said yesterday that the governor has been in contact with legislative leaders, but is withholding endorsement for the tax increases.

"The massive increase in taxes puts the state in danger of losing business from corporations that move elsewhere and people that choose to buy elsewhere," she said. "The governor still fells spending can be reduced by $200 million."

Ms. Precari said the governors also wants Democratic leaders to move forward on reforming the budget process and educational reform.

North Carolina is the only state that does not allow its governor to veto legislative bills.

Subscribe Now

Access to authoritative analysis and perspective and our data-driven report series.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.