By James Nani

Law360 (April 24, 2020, 8:04 PM EDT) -- North Carolina's Senate leader said Friday that his chamber won't consider overriding a $24 billion state budget veto the governor issued in November that included franchise tax cuts, ending a showdown that lasted nearly a year.

Sen. Phil Berger, R-Rockingham, the Senate president pro tempore, announced that when the General Assembly returns for a legislative short session Tuesday, the senators will not reconsider Democratic Gov. Roy Cooper's veto of the state budget, H.B. 966.

"Our focus will be on providing relief for North Carolina citizens suffering because of the COVID-19 pandemic," Berger said, referring to the respiratory disease caused by the novel coronavirus.

"Our state's financial outlook is in a vastly different place than it was before this pandemic hit," Berger said. "Because of that, we will not be reconsidering the veto of the state budget this year."

Berger said the novel coronavirus pandemic is causing billions of dollars in revenue shortfalls, hurting the ability to fund the vetoed budget. Senators also sent a letter to Cooper on Friday asking him to push for state agencies to find 1% savings in their budgets, equal to about $250 million, in order to provide additional savings in anticipation of revenue shortfalls in the next fiscal year.

"In order to ensure that we can continue to operate basic government services into the next fiscal year, it's more prudent to keep operating on the certified budget," Berger said.

Berger's announcement followed what has been a complex back-and-forth between the Democratic governor and the General Assembly, controlled by Republicans.

H.B. 966 was passed in June, but Cooper quickly vetoed it. While Republicans hold a majority in both legislative chambers, they don't hold a supermajority in both to guarantee an override of Cooper's veto.

The state House of Representatives had managed to override Cooper's veto along partisan lines in September. Democrats protested that the minority party wasn't informed the chamber would hold a vote. With mostly Republicans attending the session, the vote easily cleared the three-fifths majority of members present needed for an override. But action on H.B. 966 stalled in the state Senate, and a series of so-called mini-budget bills were introduced instead.

H.B. 966 included a decrease to North Carolina's franchise tax rate from $1.50 per $1,000 of net worth to 96 cents per $1,000 of net worth over two years, 2020 and 2021. It also included a new definition of a holding company to allow entities under that designation to have an annual franchise tax cap of $150,000. In addition, it included a repeal of one of three methods of calculating a corporation's franchise tax base that requires corporations to determine 55% of their appraised value of real and tangible personal property starting on Jan. 1, 2021.

The measure also included proposals to increase the standard deduction for personal income tax by 5% for taxable years on or after Jan. 1, 2021, and a shift to market-based sourcing for multistate income tax apportionment starting Jan. 1, 2020. It also proposed marketplace facilitators to collect sales and use tax with gross sales of more than $100,000 or 200 or more separate transactions into the state in the current or previous calendar year, the same thresholds the state uses for remote sellers.

Tax elements of H.B. 966 ultimately made it into two other mini-budget bills last year — S.B. 578, which was passed in October but which Cooper vetoed in November, and S.B. 557, which Cooper signed into law. 

S.B. 578, which drew mostly party-line support, would have cut the state's franchise tax rate, repeal one of three methods of calculating a corporation's franchise tax base and reduced the qualifying expense threshold for awards from the state's film and entertainment grants, according to the bill analysis.

S.B. 557 increased the state's standard deduction for personal income taxes, expanded the definition of a holding company for franchise tax purposes and enacted a marketplace facilitator law. It also enacted market-based sourcing, which requires a multistate corporation to calculate its sales factor, for apportionment purposes, based on the percentage of income attributed to the consumption of products and services in the North Carolina marketplace. S.B. 557 passed with mostly bipartisan support.

In statements from October, Cooper said he vetoed S.B. 578 because it put corporate tax cuts ahead of raises for educators and made changes to film industry incentives that weren't paid for. He said he supported S.B. 557 because it put local retailers on par with those from out of state and provided more resources to the general fund.

The office of House Speaker Tim Moore, R-Cleveland, didn't immediately respond to requests for comment on Friday.

Democratic minority leaders didn't immediately respond to requests for comment on Friday.

Cooper's office didn't immediately respond to a request for comment. But his office on Friday proposed a series of measures and spending in response to the coronavirus pandemic ahead of the legislative session next week. Those included allowing access to state reserve savings to ensure a balanced budget and cash flow by the close of the fiscal year on June 30. Cash flow has been affected because of the state tax filing shift from April 15 to July 15, pushing tax receipts into the next fiscal year, Cooper's office said. 

Cooper asked for legislative changes allowing the secretary of the state Department of Revenue to waive the accrual of interest on overdue taxes. Interest accrues at a 5% rate from the original due date of the tax return. 

--Additional reporting by Paul Williams. Editing by Neil Cohen.

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