The state Senate gave preliminary approval Thursday to an intensely debated tax-reduction bill that contains a direct franchise-tax benefit for Reynolds American Inc.

Senate Bill 622 was approved by a 26-19 vote along partisan lines. The bill is on the agenda for Monday's 2 p.m. Senate floor session.

The bill’s fate is unclear in the state House, and media reports have said Democratic Gov. Roy Cooper is considering a veto.

Cooper spokesman Jamal Little said Thursday that “businesses need a strong workforce more than they need additional tax breaks for corporations and the wealthy.”

“To achieve that, Gov. Cooper would rather invest in higher teacher pay, along with stronger public schools, community colleges and universities. He looks forward to real budget negotiations with the legislature.”

The bill was amended Wednesday to add language projected to generate a $4 million tax break for Reynolds.

The language reflects the changes in Reynolds’ ownership status — its $29.25 billion purchase of Lorillard Inc. in 2015 and British American Tobacco Plc spending $54.5 billion in 2017 to buy the 42.8% of Reynolds it did not already own.

Sen. Paul Newton, R-Cabarrus, and bill co-primary sponsor, said the language provides Reynolds with what he called a break from a “double taxation” burden. The franchise tax is based on corporations’ net assets, not their earnings, in North Carolina.

“We never intended for the franchise tax to happen twice,” Newton told Raleigh television station WRAL on Wednesday.

Although the bill would cover corporations owned by holding, or parent, companies, the added language specifically targets Reynolds because it requires beneficiaries to be engaged in manufacturing, generate more than $5 billion in annual revenue, and “includes the same intangible assets, royalties and license fees in its net worth base” as its holding company does.

“A technical quirk in North Carolina tax law caused R.J. Reynolds Tobacco Co. and other similar companies to be taxed twice on the same property,” Reynolds spokeswoman Kaelan Hollon said Thursday.

“We’ve been transparent and open in seeking to fix this flaw in the tax code and we appreciate the legislators and non-partisan tax staff who collectively agreed that paying tax twice on the same property was not the intent of the law and worked to draft this fix.”

Discouraging investment?

The overall intent of SB622 is what generated fierce debate during the floor session.

The bill would reduce the franchise tax from $1.50 per $1,000 in corporations’ net assets worth to $1 per $1,000 by 2021.

The office of Senate leader Phil Berger, R-Rockingham, said North Carolina is one of 16 states with a franchise tax. Berger officials said the franchise tax “discourages in-state investment and the accumulation of assets, such as new plants or equipment.”

According to a legislative staff paper, the bill would reduce state franchise-tax revenue by $101.9 million in year one and by a combined $1.12 billion over five fiscal years.

The bill also would introduce a cap of $150,000 on tax liability, and eliminate the 55% of appraised value base for taxes.

Overall, state tax revenue to the General Fund would drop by about $9.3 million in year one and $780 million over five years.

The reduction is projected to be offset somewhat by growth in sales-and-use taxes of $94.6 million in year one and $655.8 million over five years.

The bill also would reduce revenue from personal income taxes by $306.5 million over five years.

SB622 raises standard deductions by $375 to $10,375 for single taxpayers and married filing separately, by $563 to $15,563 for a head of household, and by $750 to $20,750 for married filing jointly, effective in 2021.

Sen. Jerry Tillman, R-Randolph, and co-primary sponsor, said SB622 represented the culmination of eight years of Republican efforts to reduce the state’s franchise tax, with a goal of eventually eliminating it.

“It is one of the most onerous laws and most hated by employers,” Tillman said during the floor debate. “It is as anti-business as it gets.”

Offsetting revenue loss

Although Tillman acknowledged the tax-revenue reduction, he and other GOP leaders stressed it would be more than offset by sales tax growth, as well as by businesses adding jobs and opening operations in the state.

Tillman projected as much as $9.5 billion in tax-revenue growth over the five-year period.

Sen. Floyd McKissick, D-Durham, expressed concern the state’s economy has not recovered evenly across North Carolina, and said tax revenue from the current franchise tax should be used to bolster healthcare, infrastructure and educational spending.

“I have not heard of one company who has made a decision based solely on cutting the franchise tax,” McKissick said.

Newton responded by saying that reducing the franchise tax would help low-income residents by encouraging businesses to create more jobs paying a middle-class wage.

Tillman said that since 2011, Republican tax legislation has spurred North Carolina’s economic growth, leading to a 17-year low in the state unemployment rate “and the best running economy we’ve had in many years.”

“There are more jobs than there are people looking for them. It’s not an accident. It’s a point of envy.”

However, many economists say North Carolina’s economy is benefiting more from the strength in the national economy than from North Carolina legislative initiatives.

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rcraver@wsjournal.com 336-727-7376 @rcraverWSJ

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