The Washington PostDemocracy Dies in Darkness

The complicated story behind North Carolina’s best-known tax break

State House Speaker Thom Tillis applauds guests in the gallery from the House floor during the opening session of the General Assembly in Raleigh, N.C., on May 14. (AP)

In one of the country’s most hotly contested Senate races, Democrats are filling the airwaves with an explosive charge: That state House Speaker Thom Tillis (R) let people who buy airplanes and boats keep a valuable tax cut while slashing education budgets.

“Tillis sliced and diced education, creating chaos in our classrooms and hurting middle-class families, while giving tax breaks to yacht and jet owners,” one ad, sponsored by the Democratic Senatorial Campaign Committee, claims.

The advertisements are factually accurate. But they are also an example of the complicated evolution and lifespan of a state tax code: In the half-century since those tax breaks were first established, they have earned bipartisan backing — including support from the Democrat against whom Tillis is running.

The tax breaks on airplanes and boats are a bipartisan idea that literally pre-date Tillis’s existence on Earth. The attack that Democrats have driven so hard is less about those specific preferential tax breaks and more about the contrast on education funding: Recent polls show a plurality of North Carolina voters say education is the issue they care about the most.

But the history of the tax break itself is more complicated. In fact, it’s a tax break Sen. Kay Hagan (D) voted for — and even helped maintain — when she was in the state legislature.

The tax break first passed the state legislature in 1957 [pdf, see the tax break on page 106], when Hagan was 4 years old and three years before Tillis was born. It set a sales tax on aircraft, boats, railway cars, locomotives and all associated accessories. (What exactly qualifies as a locomotive accessory goes unaddressed in the law; it is not clear whether an engineer’s overalls count.)

Initially, those luxury items carried a 1 percent sales tax, with a maximum tax of just $80 on airplanes. Both the tax rate and the caps grew in subsequent years, to 3 percent and $1,500, respectively, in 1989, according to the North Carolina Department of Revenue.

But by 2005, the railroad lobby had lost its clout, and a new regime was in charge. That year, the Democratic-controlled legislature refined the preferential tax rate, lopping off special lower rates for railway cars and locomotives — and for a number of other once-protected specialty goods, like horses, mules, semen to be used for artificial insemination of animals, mobile classrooms and offices. But the legislative authors specifically saved the special sales tax rate of 3 percent, to a maximum of $1,500, for aircraft or boats.

Legislative records show the strike-throughs eliminating all those other special tax breaks but maintaining the aircraft and boat rates making their first appearance in the Senate version of the 2005 budget (search for “boat” and you’ll find the right section). That budget was sponsored by three Democratic state senators: Walter Dalton, Linda Garrou and Kay Hagan, who, at the time, was co-chair of the state Senate Budget Committee.

The strike-throughs do not appear in the initial House-passed version of the 2005 budget, meaning House members didn’t alter any of the tax breaks. But they do appear in the final version. The governor at the time, Democrat Mike Easley, signed the budget into law on Aug. 13, 2005.

Still, when the Republican-led legislature extended the tax breaks in 2013, it gave Democrats fodder for attack ads. The budget passed by the legislature, under Tillis’s leadership, maintained the 3 percent cap, a break that costs the state $14 million a year. Two major groups opposing Tillis, the Senate Majority PAC and the Democratic Senatorial Campaign Committee, accused the speaker of maintaining the tax break while cutting a total of $259 million from the state’s education budget — and a total of almost $500 million over two years.

The budget with Hagan’s name on it, in contrast, increased spending on education by $288 million.

“This is not about a specific tax break. It is about the priorities Thom Tillis showed,” said Ty Matsdorf, a spokesman for the Senate Majority PAC. “He kept a tax break for yachts and jets while cutting $500 million in education spending and eliminating tax breaks that help middle-class families.”