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Senate | April 26, 2016 | Committee Room | Finance Committee

Full MP3 Audio File

[BLANK_AUDIO] [SOUND] Can we have the Senate Finance Committee come to order. If members can take their seats, and sergeant at arms do we have an opportunity to open up another row over their and let some folks seating from the department of Revenue an opportunity to seat down and enjoy themselves? >> Yes sir. >> Okay >> We were holding that for family and friends. [LAUGH] >> Is the ATNG/g plan? [LAUGH] Okay, first of all, we have our pages for today and if I mentioned your name, I'll do my best to get them correct, but please raise your hand. Luke Smith, Senator Raven, Nicholas, Jones I'm sorry, Senator Raven, thank you Nicholas. I need [INAUDIBLE] >> [LAUGH] >> Should have put my glasses on? [UNKNOWN] Senator Blue. Nice to have you here. Watson Reyes, Senator Berger, Kindin Godwin, Senator Jackson, Ann Capp [INAUDIBLE] Senator Smith. And Austin of [INAUDIBLE] Senator McKissick. Welcome glad to have you here and I hope you'll stay with us as Senate pages will be informative and a good opportunity to meet some other great students and young people from North Carolina. We are very happy and very proud to have you all come visit. Then we have sergeant at arms Jim Hamilton in [UNKNOWN] Thank you folks for helping us keep this meeting organized and moving forward. We have Senator Wesley Merrideth, heard about all the fun and excitement that we have, has asked to come back on the finance committee. They'll be a psychiatric evaluation after that. But we're delighted to have you here. And with that being said, I have an opportunity to bring forward- >> Mr. Chairman. >> Yes sir? >> Inquiry the chair in my- >> Senator Apodaca >> Would it be possible to move Senator McKissick and Senator Jackson to the other side of the room so that they can be in front of the camera, and not have them behind them. >> You don't ever get between them, so why don't you ask the camera to move. >> [INAUDIBLE] >> No question. No question. [LAUGH] We're gonna pick up Senate Bill 725, Representative Howard, welcome, good to have you here and it's always good to say hello to our good friends. >> Thank you Mr. Chairman and- >> Is unemployment insurance technically changes? >> Yes sir. >> From the oversight committee on unemployment insurance. >> That's correct. There's actually only three sections of the oversight committee has looked at this changes, and we worked closely with the department. So everybody is in agreement, section 1 simply clarifies the rule for Suta Dumping, and that is the state, unemployment tax adds, Suta. The tax is based on the tax rates that go up when employees file unemployment insurance claims. And what we will find in employers we're trying to get new Suta tax numbers to pay in order to pay a lower rate of tax, and although we'd escape the claims history from their past lay off of employees. North Carolina law, prohibits seeking new tax numbers called suta dumping. And section one simply modernizes the language and keeps the same continuity of control test/g to prevent the Suta dumping issue. Section two adds the phrase, have the power to make clear the board of review can independently select hearing officers. And section three of the bill is just the effective date when the bill becomes law and with that Mr. Chairman I'll be glad to try to answer any question. >> Members of the committee, Representative Howard has presented the bill, we can You can questions to Representative Howard,

in order staff. Senator Mckissick it's so good to see you today. >> Good to see you as always Senator Rucho. >> You have a question? >> Yes. And Representative Howard maybe you can help me with this in terms of the authority for the board of review to select, I guess an attorney to service a hearing officer. Can you explain a little bit more fully or maybe staff can how this differs from what is done today in terms of that process. It looks like the key thing is dealing with the taking and accepting of evidence during a hearing but perhaps you can elaborate on that a little bit further. >> Senator I will refer to staff Mr Chairman but I think they key word is independently select/g. So miss chairman I would like- >> Yes. Mr. Ronny. >> Yes. Senator McKissick the board review itself, the chairman of it asked the department of commerce division of homeland security to make this Make this change and when you look at the statute, all of it's power the board of review has it just has the power to accept and not sentence, and it looks like it was just as an error when the statute was first implemented to create the board of review. So they just didn't put that phrase in there. There were some attorneys somewhere who thinks the absence of that phrase in that sentence somehow means that they don't have the same level of authority independence in that grant of authority, than they do an all other senateses/g of their creating statue. And so I think it's just an abundance of caution to try to correct this. So that all the sentences/g are parallel. Follow up Mr Chair. >> Follow up. >> From an operational perspective the person serving in that capacity would still continue doing what they are doing today, but it will make it less likely to be challenged some point in the future through litigation is that what is that what I'm understanding? >> I think the board of review wanted to, right now all the attorneys are employees of the department of commerce, and so there's a recommendation from a PED study committee to try to change that and the department of commerce has said publicly that they're assign some of those attorneys over there to the board of review whether legislation occurs or not and so I think that what's happening right now is that the department of commerce is acting as the border review has requested them. But I think in the future to increase independence of the border review, the border review wants to make it absolutely clear that they have authority just like the attorney and that they are not merely at the good graces of who the department of commerce wants to assign. >> Last follow up. >> Follow up question. >> Yeah, so would that open the window up to retain if it council outside the department of commerce or outside department of Justice are using some other state employee for that purpose. I mean, does it open that window? I think theoretically yes because if the publicly discussed plan that you are oversight when the division of employment security spoke and their acting Director Tim Brian said we'r going to assign Attorney's board for review, so they would be working for the board of review and not for the department of commerce and so I would assume that once the board of review has that level of control, they could choose to hire and fire their employees. I guess to comment I guess I'll support it because they've asked for it and it clears up that we never give at it, but I think we need to be mindful of anything that opens up an opportunity for budgetary issues in the future that we may not be aware of because they are planning to retain private accounts to do some of this stuff. >> Representative Howard. >> Mr. Chairman That would not be an issue senator because all of the funding for the entire department comes from the amount of money that employers pay EN and there's grants that come back down, so there's no budget item that would be involved here. >> Just a little bit more clarity, the original intent was this commission would be totally independent of DES, so that when the process was going through for review it would not be just like another step in DES process but a totally independent review, so the recipient or the person in question would have another independent and totally away from the DES system review before they have a choice to go to court if they do. >> I remember when you proposed it. >> Yes, sir. >> I though it was a good idea at the time. >> And I think this is the step in that direction. >> Thank you. >> Thank you. Members of the committee any additional questions? Senator Bryant? >> Mr. Chair I have a Question about that same section, I just wanted to ask the staff

to look at, I 'just not clear how adding Shell have the power, equates to them independently able to select the hearing officer because at the end of that sentence the officer has to be employed In the capacity of an attorney by the department and then prior to that, it says in the previous sentence that the hearing should be open to the public, show consistent review of evidence taken by a hearing officer designated by the board So that's in line 20, so I'm confused as to how she'll have the power, I don't oppose them having the power but I just don't understand how it addresses the problem and Mr. Chair, I just wonder if they need another Senate, if they're really trying- >> Senator [UNKNOWN] let's see if we can get to DES This representative to be able to help us with that question and where are you. [BLANK_AUDIO] Okay, can you come forward and help us and please identify yourself, so senator Brian can get some clarity on her question. [BLANK_AUDIO] >> Hi, my name is John Hue Manny. I'm Chief Counsel for the Division of the division of the Department of security. Senator Bryant, you're correct in that the senate that's being amended does still state that the board of review have the power to provide for the taking of events by a hearing officer employed at the capacity of an attorney by the department. That's the way the statute's currently written, that's the way it's currently amended. So I think it would have to be. That's how we can interpret [INAUDIBLE] >> Follow up Mr. Chair. >> Follow up. >> So, I was just interested in how this allows them to independently select, when the prior senators on line 20 says they get designated here in office. So I am just confused that all, and I wonder if Am I gonna- >> I may not be on that- >> Senator Bryant let's have [INAUDIBLE] try to help with that [INAUDIBLE] >> Senator Bryant, the division of employment and security as well as the board of review is housed within the department of commerce. >> I understand that. >> And so I think the question is not about the board of review being able to hire an outside or an outside attorney its just the ability to have an attorney that answers only to the board of review. That attorney doesn't primarily answer to the division of employment security. And we believe that they have the ability to have an attorney that answers just to the board of review without those words, but with those words the attorney on the board of review as well as the attorney for the division, as well as our staff believes that it just clarifies that this gives the board of review an independent attorney, that that attorney will not answer to the division of employment security. It still has a department because the border review is under the department so would be hired as a department employee. Mr. Chair, I surely support what they've said, I just wanna go on record of saying, this language doesn't accomplish what anybody is describing and perhaps down road at some point an additional clarifying sentence or phrase might need to be added to accomplish what Ms Avery [UNKNOWN] >> We'll surely take that into consideration. Any additional questions members of the committee? Senator Raven? >> Mr Chairman I move for favorable report. >> All right. I've got a favorable report, motion favorable report on senate bill 725 unemployment insurance technical changes, and members of the committee, questions or comments? seeing none, all in favor of the motion for February report on Senate Bill 725 please say aye. >> Aye. All opposed nay. Ayes have it Representative Howard thank you very much. Let's talk about senate Bill 726 and I think Mr. Romney is is going to give an overview of, excuse me Mr. Tart/g, gonna give an overview of the IRC update, I was ahead of myself. IRC update 726 and as you all know, this is a normal response that the general assembly has to have to the changes in Congress. And we tried to get it done as early in the session as we can so that the tax payers will again have some clear direction. Mr. Tart. >> Yes sir. >> So this is the annual bill that brings North Carolina to compliance with the most recent version of the internal revenue code is necessary because we start our tax calculations with federal income. And so I'll refer you, if you're looking at your packet for senate bill 726, next to the last page has physical note. And that physical note will show you this is essentially the same bill that you passed last year for the internal revenue code update As far as the fiscal impact of conformity, it's because of conformity to a teacher-classroom expensive notion about the $250,

you'll see there in the table that estimated that's judicial revenue by about a million and a half per year. The bill also couples from the same as last year and they were listed in the bill summary. >> Members of the committee, same bill pretty much as it was last year and the year before, so we are remaining consistent with the way we are handling it. Senator Ford. >> Thank you Mr. Chairman. Taking a look at section four which is coupling and requiring tax payers to pay taxes on four closed homes, Mr. Chairman in light of the projected budget surplus, would you entertain an amendment to conform with that particular change? >> Senator before you're welcome to put an amendment any time you like but I believe that this went through the revenue laws and we felt that this is the third year in a row,and I think you may even ask the question the last two years as a matter of fact, but there were no comments or questions by anybody dealing with this issue, I have asked people both in revenue laws and within the senate if they have heard anything from anyone else in regard to this so my position would be not, but you are welcome to do whatever you'd like to do. >> Follow up. >> Yes sir. >> Mr. Chairman I appreciate that latitude but I really would like to have your support and I think it's important If anybody knows anything about tax in the state of North Carolina that we do that, but again in light of the projected budget surplus there is some additional revenues available and the fiscal impact is only eight million dollars and it is non reoccurring and I juts think that it would be a nice gesture for hard working family families in North Carolina who have found themselves on hard times now having to be required to pay taxes on a home that they no longer own, and so if you could see it in the kindness of your heart- >> You brought this up before, and I never once had a person to comment, but the good news is, and I'm glad you recognize the surplus, we are able to achieve, and what that might usually be done, when you sign onto the middle class taxpayers relief act, you can sign right next to my name and we'll both help out the entire group of middle class space. >> Let's follow up, I take it that that's a no. >> Senator Tolman? >> Mr. Chairman, seeing how as Senator Ford is going to strike out. I move for favorable form/g. >> I have a motion for favorable report on Bill 726 IRC update, members of the committee, questions, comments? Seeing none, all in favor please say aye, >> Aye. >> Oppose, nay. >> Ayes have it And we'll go ahead and move on and again that will be going to the floor of the senate. Now we'll pick up senate bill 729 various changes to the revenue laws. Members of the committee this was a previous year's revenue law bill that did not get an opportunity to totally through the General Assembly last year, now I think I'm correct in saying Mr. Rooney is going to give a review of this bill, >> Yes sir, the foundation of the bill is the material that passed both chambers as 605 But 605 was never enacted into law. So slightly different versions passed the House and Senate, what this bill is, it just took everything that passed both chambers and stuck it together. We've put in some more technical changes or in part of revenue. I can only think of one that really needs to be highlighted which is the We changed the part revenue in industry got together, and there was a desire right now into current law, we have a 30% cap/g on this interest deduction expenses [INAUDIBLE] expense, and so this bill here takes that limit from 30% to 15%. However, it introduces a 100% unrendered/g [UNKNOWN] if you can trace that interest expense back to an unrelated lender. And that was to try to help industries where like one common parent goes and gets, issues bonds or something, raises a whole lot of money, and then they use that money throughout their subsidiaries as it tears down, and so the industry was saying that that was unfair, because it would hit the 30% cap even though the interest was being paid to a third party lender, or paid on bonds. So, there's a lot of provisions on the bill, most of them are highly technical and almost all of them were in sic or five past the senate. >> Members of Committee,

that was a brief overview of it, but this committee can take time and go through each of the items and if requested, we'll be delighted to accommodate that. Senator McKissick. >> Just a question for Greg. I know you said everything is in here that was in 605, it passed the Senate. What is in here that is parallel to 605 that passed the House? Because I recall that being different in nature and composure and I can remember one specific provision in there that dealt with issues about light rail expenditures and $500,000 caps and doing that whole type of thing. I remember there being different versions of 605 so how does this This differ from the 605 that the house passed that would have gone to a conference that never went anywhere. >> Mr. O'neill would you clarify senator McKissick misunderstanding here. >> The beginning foundations of the bill was provision that passed both chambers so it had to pass the senate and the house so there's nothing in here that just passed one chamber, it had to pass both chambers so there's no light rail material in here. So everything the senate passed that the house passed also. >> Both houses have passed this portions of the bill therefore the ones that pass both House and Senate are included in our Senate Bill 729. >> Okay so it's the components that are common to both. >> That's correct. >> There was a different version that came from the House- >> That's right, except the one provision that used to- >> [CROSSTALK] never met and resolved everything. >> That's correct. Mr. Chair. >> Yes sir? >> But it does have some new technical material in it but the department of revenue came up with some more technical things along the way and there were technical errors found in the bill and so those were all fixed, but other than the interested option, that was the only substitute new thing Okay senator McKissick. Okay >> Yeah, clarifies it. >> Thank you, senator Apodaca. >> Thank you Mr. chairman I have a question here if I may call your attention to section 1.3. Dealing with transportation organisations, I think airlines in general, this has nothing to do with the generous tax credit, Caroline's received for fuel does it? >> Not in this bill >> Thank I wanna make sure. >> Senator Heist/g >> Thank you Mr. Chairman, I had some question on really the fiscal mode that's coming on here and kind of me with this brawl plus or minus five million. I'm just trying to get the sense of, I assume certain companies at least for this cuz it's good for their operations. I'm trying to get a sense of do we know specifically in the reduction from 30 to 15 how much addition revenue that would expect to be? On prior returns and then we're kinda guessing at the other side of how much would be able to trace this to large loans or capital investment - >> Mr. Tats/g Senator Issac we don't have enough information we discussed this in detail with department. We really don't have enough information to give to give you the plus or minus of each side. I could give you some background on this. This was originally under current law, this was passed last year, and it was done to close a loop hole that some companies had used to inflate their tax reductions. And they did that by Paying interest on loans to an affiliate, creating inter company loans to create tax reduction. So there is a limit put in place that said that tax reduction can't be greater than 30% of your income so that was what was put in place last year. And in this provision, after the various exchanges Exchanges and great thought about between industry and the department reduces that percentage limitation from 30% down to 15%, then as exception to that limitation, if the tax payer can show, that it's creditor affiliate actually borrowed the money from an outside source, a non related source like a bank and it wasn't Just income shifting. So that's what it does. We do not have the level of data that would allow us to give you a precise estimate, but we do recognize that you could ask some winners and losers up and down each way. That's why we've noted a fiscal note for you with an uncertain estimate of Ranging from plus or minus 5 million per year. >> Senator Heiss. >> Is the interest rate deductible the amount of interest rate the third party company is paying to the bank or is it that the original

company is paying to the third party now. For example is the option here to borrow Borrow it at 3% right now and then loan to your own company at 10 and create that kind of [INAUDIBLE] >> Well, here's an example. If I am Corporation A and I borrow money from my parent company. Let's say I pay $50 in interest expense on that debt this year. My interest deduction for that payment would be limited to 15% of my income under this bill previously it was limited to 30% of my income, just the way to sort of put a barrier on them and in slating that interest payment too high. This year after that interaction with some of these these companies that limitations was reduced from 30% down to 15% but then the companies were granted, there's an exception and so back to my example, if instead of the parent just loaning money to that affiliate and creating an interested partnership with that affiliate. The parent can show that it actually borrowed the money from an outside bank like walk over you like the Bank Of America, then it could be exempted from that limitation. And the reason that companies originally did this was because there are some tax-haven States for interests like Delaware, so they set up an affiliate in Delaware they could receive an interest payment without being subject to tax while giving their affiliate in North Carolina a tax deduction. So there's a limit to put there, it reduces the limit just it provides an exemption if they can substantiate the outside debt involved.>> Just to follow up, >> Yes sir, follow up, > But the Deduction is still the amount of interest paid by the company to it's affiliate, not what the affiliate is paying in interest to a bank that it borrowed the money from? >> Yes Sir, that's correct. Okay, any additional questions? Say none. Senator McInnis has a motion that we have a favor report on Standard Bill 729. Various changes in the revenue laws. Comments, questions? Seeing none, all in favor? Please say Aye. >> Aye. >> Oppose, nay? Ayes have it. Senator Tolman before we adjourn any comments? >> No sir. >> Okay Senator Raven? Members in the committee stay tuned to the emails, we may be having an additional meeting tomorrow in Finance. Senator Ford, do you wanna make a comment Comment to? Okay. Ladies and Gentlemen, meeting's adjourned. [SOUND] [INAUDIBLE] [INAUDIBLE] had not contacted me about the bill, she needs [INAUDIBLE] >> She's going to be the Primary Sponsor, we'll get her right now. >> Okay, >> Sir [UNKNOWN] can you talk with real quick [BLANK_AUDIO]