North Carolina's sales tax rises tomorrow by a penny from 6.75 percent in most counties to 7.75 percent.

The increase was pushed by Gov. Beverly Perdue and adopted by legislative leaders, all Democrats, as part of a $1 billion tax increase package and a series of spending cuts to balance the state budget this year.

The local portion of the sales tax can vary, as in Mecklenburg County, which includes and additional 1/2-cent transit tax. Its rate will be 8.25 percent starting tomorrow. Alexander, Catawba, Cumberland, Haywood, Martin, Pitt, Sampson, and Surry Counties will have rates of 8 percent.

The sales tax accounts for about 30 percent of state revenue, but it also is the quickest source when legislators are looking for a cash infusion. Consumers start paying it right away, while income tax increases are mostly paid the following year.

The sales tax is criticized as disproportionately burdening middle and lower class taxpayers and also because the tax base for it is shrinking. Consumer spending has been shifting toward services, many of which are not taxed.

The House gave final approval late Monday to legislation allowing Triangle counties to raise the sales tax by 1/2-cent to pay for light rail and more buses.

House members voted 73 to 40 to let Wake, Orange and Durham counties boost the sales tax by 1/2 percentage point, if voters approve. The money would help bankroll a 25-year regional plan that would link Raleigh, Durham and Chapel Hill by light rail and put 300 new buses on the roads.

The Senate already approved the bill

Guilford and Forsyth counties in the Triad also could vote to raise the sales tax for transit money.

The legislation allowed every other county, except Mecklenburg, to vote on a 1/4-cent transit tax increase. Mecklenburg already has a 1/2-cent transit tax added to its sales tax rate.

Some lawmakers questioned whether voters would rally behind a tax increase during a recession and after the legislature just voted to raise the sales tax statewide by an additional penny, or percentage point.

The bill authorizes two other sources of transit revenue in the Triangle: an increase in the transit car registration fee and Research Triangle Park landowners could pay a transit tax of 10 cents-per-$100 property valuation.

House Speaker Joe Hackney said in a news conference this morning that when people see the cuts lawmakers had to make to balance the budget, paying an extra 1 percent in sales tax wouldn't seem so bad.

"The sales tax is something that is accepted by and large by the public," he said. "A temporary sales tax that goes to education in large part is something that the public will find acceptable."

The 1-cent sales tax increase would bring in about $804 million in the next fiscal year — the bulk of the budget's $990 million in new taxes.

He said members recognized that a sales tax increase was not an ideal way to raise revenue since it burdens working families more than high-income earners, but added that it was the best compromise lawmakers could reach in hopes of passing the budget.

"The sales tax is not something that is loved by all of us here," Hackney said. "But you need to balance it in a way to get enough votes to pass the bill."

Gov. Beverly Perdue had previously objected to a proposed income tax surcharge for all taxpayers because she said it would affect working families. House Republican leader Rep. Paul Stam said the sales tax is worse.

"The idea that that's not paid by working families just boggles the imagination," Stam said. 

Sen. David Hoyle, a Gastonia Democrat and co-chairman of the Senate finance committee, said Thursday that budget negotiations are making broad tax reform difficult.

Both House and Senate Democrats have proposed revenue plans that would restructure parts of the tax system. The Senate's plan would broaden the sales tax base to include a variety of services while lowering rates for every major tax category.

Hoyle said that in negotiations, the House has been reluctant to sign on to parts of the Senate's plan.

"The House just can't seem to bite into that apple," Hoyle said. "And if they can't, then we have to move away, and where do we move? We have to go somewhere along the lines of the governor."

He said that means more traditional ways of raising revenue such as a sales tax increase and an income tax increase for high-income earners or businesses.

A proposed Internet "clicks" provision in the new sales tax proposal has prompted Amazon.com to threaten to cut off state residents from commissions for referrals to the online retailer.

Amazon.com's program pays a commission of up to 15 percent for online referrals. The House budget bill uses those arrangements to require out-of-state retailers such as Amazon.com to collect sales tax on all North Carolina sales.

The sales tax would prompt Amazon.com to end commissions within the state, according to an e-mail sent to participants of the program.

We regret to inform you that the North Carolina state legislature (the General Assembly) appears ready to enact an unconstitutional tax collection scheme that would leave Amazon.com little choice but to end its relationships with North Carolina-based Associates.

"In a world where we're living through the worst recession in our lifetimes, I don't think this is the right time to do anything that would rock the boat and upset the already tenuous position of North Carolina businesses," said Rick Ross, president of DZone, which runs community sites for Web developers.

Ross, a Cary resident, said his site reviews tech books and probably earns $200 a month for referrals to Amazon. Other sites get more income from the referrals, he said.

Correction: Earlier version of the post misstated the tax provision.

Update: An Amazon.com spokeswoman said the state was relying on an incorrect interpretation of the U.S. Constitution to levy sales tax on the company.

More after the jump.

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Charlotte Mayor Pat McCrory this morning ripped a tax proposal by N.C. House Democrats that would raise some income taxes to help close a $4 billion budget shortfall.

The House is considering a $940 million tax package today that would raise the sales tax and income taxes for those earning more than $200,000 a year, Jim Morrill reports.

"It's the last thing you need to do during a recession," he said. "The income tax is the most harmful tax to raise because you're only punishing those who are actually working ... This hurts our economic development efforts here in Charlotte, North Carolina ... when there's a cheaper place to live."

McCrory, last year's GOP gubernatorial nominee, said he worries that raising income taxes on the affluent could drive businesses from North Carolina.

Asked how he would deal with the record shortfall, McCrory offered no specifics but referred back to his 2008 campaign.

In October, when forecasters predicted a $2 billion shortfall, McCrory and Democrat Bev Perdue both said they opposed tax hikes and would convene expert panels to identify cuts and efficiencies in state government. Perdue Monday called on the House to include new taxes in its budget.

Tax policy will be part of McCrory's speech Friday at the GOP state convention in Raleigh.

Powerful nonprofits oppose a Senate tax reform plan.

A handful of large urban hospitals and private colleges oppose a measure proposed by Senate Democrats to limit the amount of refunds they can recieve on sales taxes at $5 million a year.

They think it would set a bad precedent for tax-exempt institutions.

"You're either tax-exempt or you're not," said Tim McDowell with North Carolina Independent Colleges and Universities. "That's why I think every nonprofit should be worried about this."

But Democrats say the plan will only work if everyone gives up something.

"We're not trying to gore anybody's ox here in particular. But we're just saying we have got to have some help from all segments from our economy," said Sen. David Hoyle, D-Gaston, co-chair of the Senate Finance Committee. (AP)

* U.S. Rep. Mike McIntyre tells Wilmington TV station "you never say never" when asked about running for Senate.

* Transportation blogger Bruce Siceloff notes that the House gave preliminary approval to a local-option sales tax for bus and trail transit.

* Mark Binker notes that a McGuire Woods staffer who worked for (then Lt.) Gov. Beverly Perdue's campaign is lobbying for video poker.

* Plastic bag manufacturers have announced they'll use 40 percent recycled material by 2015. They called Dome about it because of this.

Senate Democrats have their tax plan ready.

According to a document received by the Associated Press, the Senate Finance Committee will consider a proposal today that would reduce the sales tax rate but expand the services it covers, repeal the food tax and raise sin taxes.

The plan would raise $600 million a year, more than the $500 million in revenue missing from the Senate budget passed earlier this month.

Under the plan:

* The sales tax rate in most counties would drop from 6.75 percent to 6 percent.

* The sales tax would be expanded to cover moving services, building repairs and downloaded music.

* Corporate and individual income tax rates would go down.

* The 2 percent tax on food at grocery stores and other retailers would be repealed.

* The cigarette tax would be increased 15 cents per pack.

* The alcohol excise tax would be increased.

The House is also expected to put together its own proposals for modernizing the tax code.

The movement to overhaul North Carolina's 1930's era tax structure gained critical support Tuesday, when a committee of business leaders said it bakced lowering income taxes, but requiring that personal services be taxed.

The bipartisan committee called for lowering the highest marginal rates on corporate and personal income taxes, saying it would make the Tar Heel state more competitive in recruiting new businesses, Rob Christensen reports.

But it also proposed broadening the sales tax to include services that are now exempt — from lawn services to lawyers.

"We want it to be pro business," said John McNairy, president of Tidewater Transit Co. Inc. and co-chairman of the committee said a news conference at a downtown hotel.

The recommendations of the 20-member committee comes at a time when the state legislature is giving a serious look at changing the tax system and facing a $2 biillion plus shortfall this year and a $3 billion shortfall next year.

More after the jump.

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