RALEIGH, NC (AP) - The Legislature's deal to raise $982 million more in taxes this year fell apart Thursday when Gov. Beverly Perdue told fellow Democratic legislative leaders she wouldn't support their across-the-board income tax surcharge.
Senate Democrats, already uneasy about a plan that would have raised both income and sales taxes to close a large budget gap, decided later to go back to square one on the revenue negotiations because Perdue complained. The lawmakers sounded dug in again on their own plan.
"Everything's off the table," said Sen. David Hoyle, D-Gaston, one of the key tax negotiators, after a meeting of the Senate Democratic Caucus. "We were directed to start over."
The 2 percent surcharge on all income tax bills was a key element in securing a compromise between House and Senate Democrats this week, moving toward resolution on passing a two-year budget that's 3½ weeks late and adjourning for the year.
Perdue has some leverage because she'll be asked to sign the spending plan into law.
"I saw a proposal that stunned me, quite frankly," Perdue told reporters late Thursday outside the old Capitol building. "Who in the world thinks in these trying, challenging times for families that you can raise income tax on working families and middle class families?"
Now it's highly unlikely that Perdue, who complained Wednesday about the slow pace of the budget negotiations, will get a final two-year spending plan next week.
"It's unlikely at this point, but we'll try," said House Majority Leader Hugh Holliman, D-Davidson. That means lawmakers would be forced to extend a temporary spending plan a third time when the current stopgap measure expires July 31, placing more fiscal pressure on state government as public school classes resume in late August.
Perdue first made public her concerns in a news release midday Thursday after talking with Senate leader Marc Basnight and House Speaker Joe Hackney.
The news frayed the string that had held together the package and surprised Democratic lawmakers who believe a final budget was just around the corner. It also frayed nerves among Democrats who had been working on a tax plan for five weeks as Perdue's lobbyists milled around the legislative complex in Raleigh.
Senate Democrats preferred a larger tax overhaul package and unwilling to put the entire income tax burden on the highest wage earners told their House counterparts later Thursday they wouldn't negotiate again until this coming Tuesday.
Hoyle said the Senate Finance Committee would hold meetings on their original plan, which would expand greatly the number of services subject to sales tax but reduce many overall tax rates.
House Democrats didn't want to go back to the start like their Senate counterparts, saying they were willing to work from the deal they had agree upon Wednesday. It included a 1-cent increase in the sales tax and higher excise taxes on cigarettes and alcohol.
The surcharge agreed to earlier this week would have raised $197 million this year.
"We're looking at how the plan might be revised," said Rep. Paul Luebke, D-Durham. "We've heard from the governor and we're looking at different options that might address her concerns."
Perdue didn't say in the statement that she would veto the budget if it contained the income tax increase.
Holliman said he believed Perdue was concerned about putting the surcharge on individual taxpayers making more than $150,000, for example.
Perdue spokeswoman Chrissy Pearson said it was premature to talk about a veto. "The governor feels there is still a lot of negotiating to be done before getting to that point," Pearson said.
The Republicans, the minority in both chambers, jumped into the fray, arguing that she should have never proposed raising taxes and should have focused on cutting waste.
"Unfortunately, Gov. Perdue has failed to provide the leadership needed at this time," said Senate Republican Leader Phil Berger, R-Rockingham. "The Democratic tax proposal is her tax package."
Holliman said Perdue continues to want an additional $200 million in revenues to prevent further cuts in education, but he said that would be even more difficult. Perdue has been trying to prevent the average class size in grades 4-12 from going up in an effort by lawmakers to save more than $184 million this year.
"You cannot cut the heart out of public education," Perdue told reporters. "Public schools are the future of North Carolina's economy."