If you have been keeping up with the recent news coming out of the General Assembly, you know tax reform is the hot topic. Tax reform was a common campaign promise in 2012 and was supported by Governor McCrory during his State of the State address in February. So why is tax reform such a big deal right now? Well, the current tax code was written in the 1930s and structured around a manufacturing and agricultural economy. The economic landscape has changed since the 1930s, and the state needs to reassess how it funds government operations. North Carolina is currently ranked 44th in the business tax climate index under the current tax code according to the Tax Foundation.
In December 2012, the North Carolina based Civitas Institute jump-started the state’s discussion of tax reform with their tax plan. In January of this year, The John Locke Foundation and the Washington-based Tax Foundation each weighed in with their own models for tax reform. All three of these groups have similar philosophies and principles within their respective tax plans, even though they operate independently of each other. Each of these plans gave legislators ideas and models to consider when creating their own plans. Months passed after the release of the aforementioned reform plans, and in May both the Senate and the House released their tax plans, House Bill 998 and Senate Bill 677.
Table 1: NC’s 2013 State Business Tax Climate Index Rankings Under Alternative Scenarios |
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Current Law |
House Plan |
Senate Plan |
|
Overall |
44 |
19 |
13 |
Corporate |
29 |
20 |
25 |
Individual |
43 |
17 |
13 |
Sales |
47 |
48 |
16 |
UI |
5 |
5 |
5 |
Property |
36 |
27 |
27 |
The Senate’s plan was more aggressive with tax savings of about $1 billion over three years, while the House’s plan saved $572 million over three years. Both plans incorporated a broader sales tax base, eliminated the estate "death" tax and also lowered the personal and corporate income tax rates. JLF President John Hood commented on the plans by saying, "The two sides really aren’t that far apart philosophically. They differ on practical considerations. For taxpayers, the only truly impractical outcome here would be for legislators not to come to agreement."
The issue today is not "IF" there is going to be tax reform, but "WHEN" the legislature will agree a new tax plan. One reason for the certainty of a new tax plan is that tax changes are present in each of the proposed budgets. The Governor’s budget was released with a $109 million cut in available tax dollars over two years resulting from elimination of the estate tax. The Senate’s budget was released with a $770 million reduction in estimated tax collections over the biennium. The House just released its budget this week, with a reduction in tax collections of $537 million, which included a new tax credit to employers who participate in an apprenticeship program, estimated to be worth around $8.7 million over two years.
There are differences among all of the tax plans and budgets, with one constant — tax reductions. "Our ultimate goal is to reduce tax rates for North Carolina families and businesses," McCrory said. "The final tax plan must make North Carolina more competitive in order to create jobs and put our people back to work." With both the legislative and executive branches in full support of tax reform, the only thing for taxpayers to await are the final compromises and the end result.
Table 2: Comparison of House Bill 998 and Senate Bill 677 |
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Current Law |
H.B. 998 |
S.B. 677 |
|
Individual Income Tax |
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Rate |
6 percent > $0 7 percent > $12,750 7.75 percent > $60,000 |
Flat 5.9 percent (2014) |
Flat 5.5 percent in 2014, 5 percent in 2015, and 4.5 percent in 2016 |
Personal Exemption |
$2,500 for AGI < $60k; $2,000 for AGI > $60k |
Eliminate |
Eliminate (see below) |
Standard and Itemized Deductions |
$3,000 standard deduction; itemized deductions allowed |
Increase standard deduction to $6,000; allows itemized deductions (charitable contribution and mortgage interest) if exceeds standard deduction (subject to cap on local property tax and mortgage interest deductions) |
Eliminate, but replace with new zero bracket of $10k in 2014, $12.5k in 2015, and $15k in 2016 |
Base broadening |
Eliminate charitable contribution credit for non-itemizers and severance wage deduction in; eliminates $50k net business income deduction |
Repeal mortgage interest deduction; include temporary Working Families exemption for incomes between $30k and $80k (2015 and 2016 only; exemption ranges from $8,500 to $2,500 depending on income); repeal multiple individual income tax credits; repeal $50k net business income deduction (2014); repeal social security income exemption |
|
Child Credit |
$100 per child for AGI < $60k |
Increase to $250 for AGI < $50k ($125 for AGI > $50k) |
No change |
Corporate Income Tax |
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Rate |
6.9 percent |
6.5 percent in 2014, 6.35 percent in 2015, 6.2 percent in 2016, 5.6 percent in 2017, and 5.4 percent thereafter |
6.5 percent in 2014, 6.25 percent in 2015, and 6 percent in 2016 |
Apportionment |
Double-weighted sales factor apportionment |
No change |
Move to single sales factor apportionment over three years (2014-2016) |
Other Measures |
Repeal certain smaller credits |
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Franchise Tax |
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Rate |
$1.50 per $1,000 |
$1.35 per $1,000 (2015) |
$1.35 per $1,000 (2015) |
Base and Other Changes |
Highest of three possible tax bases |
No change |
Expand to include LLCs |
Sales Tax |
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State Rate |
4.75 percent |
No change |
5 percent |
Local Rate |
2 percent in most counties |
No change |
1.5 percent |
Combined Rate (in most counties) |
6.75 percent in most counties |
No change |
6.5 percent in most counties |
Special Franchise Taxes |
Repeal amusements tax and subject admissions to sales tax; repeal franchise tax on electric power, water, and sewage companies; repeal tax on piped natural gas; and make piped natural gas and electricity subject to sales tax (2014) |
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Base Broadening |
Most services exempt |
Expand to maintenance of tangible personal property, and service contracts related to tangible personal property (2014); repeal Energy Star sales tax holiday |
Expand base to cover over 130 services, all of which are taxed in at least one state; repeals sales tax holidays |
Taxation of Food for Home Consumption and Prescription Drugs |
Exempt from state sales tax |
No change |
Food subject to state sales tax; prescription drugs purchased by insurance still exempt |
Estate Tax |
Repeal |
Repeal |
|
Source: Tax Foundation review of legislation. Note: All exemptions and deductions are for single filers. For information on head of household, married filing separately, or married filing jointly, see actual legislation. |
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