Today saw a lot of activity in the North Carolina House and Senate Finance Committees, as three different tax reform proposals were presented.
More analysis from NCLM and NCACC should be expected soon, but WRAL did gather the information distributed by legislators and their staff this morning. Here is what can be gleamed so far:
- No changes to taxes shared with local governments in FY 2014
- Local option tax rate reduction from 2% to 1.9%, effective July 1, 2014
- Broadening of base to include repair and maintenance labor and other select services
- Transfer of taxation on electricity and piped natural gas over to the sales tax (called the end of “preferential rate” taxation), effective July 1, 2014
- Municipalities will be allowed to assessed privilege license taxes, but they will be capped to no more than $500/business
- Changes to local taxes would take effect January 1, 2015
- Electric & Natural Gas services would transition over to sales tax; counties will be required to distribute 100% of tax collected to municipalities
- State sales tax rate goes from 4.75% to 5%, while we lose Article 42 (thus adjusting local option from 2% to 1.5%)
- Substantial broadening of sales tax base (applicable to state and local options)
- Hold harmless provisions included
- Counties will lose 90% of their share of the real estate conveyance tax (from 2% to 0.2%) and will be eligible for hold harmless similar to municipalities
- It appears we will also lose the Wine & Beer tax money, as it is being rolled into the hold harmless provisions.
- The hold harmless provision will provide 100% gap coverage for FY 2015 and FY 2016, then go down by 10% each year and close out at the end of FY 2025.
Here is a rundown of the proceedings from this morning’s meetings, courtesy the NC Metro Mayors Coalition:
House & Senate Tax Reform Bills Released
By: Julie White, Executive Director and Kathryn Trogdon, Legislative Intern
House Bill 998 – Simplify Adjustment for Federal Taxable Income
The House Finance committee discussed the House tax reform bill H998 Thursday.
The bill would “reduce individual and business tax rates and to expand the sales tax base to include services commonly taxed in other states”.
Rep. Lewis said the bill would create a flat income tax rate of 5.9 percent and a tiered exemption system up to $25,000 with the first $12,000 not being taxed. There would also be a gradual reduction in the corporate income tax from 6.9 percent to 5.4 percent over the next five years.
Lewis said this decrease in a corporate income tax would help to spur economic job growth by bringing more business to the state.
“Having the highest corporate income tax in the Southeast creates sticker shock whenever companies are looking to locate in our state,” he said.
Lewis said although a 5.4 percent corporate income tax was still higher than the corporate income tax rate in South Carolina, it was lower than most of the other competing states.
The bill would also broaden the sales tax base to include services commonly taxed in other states.
Rep. Luebke said he was interested in how much the rich would save with a flat income tax rate.
But Lewis said he thought everyone should be taxed at the same rate, because a family making $4 million would pay significantly more in taxes than a family making $40,000.
Luebke said another problem he had with the bill was raising the sales tax, especially on services like getting your car fixed, because the sales tax is a regressive tax.
On the other hand, Rep. Collins said although he will pay more under the new tax plan, he still supports the bill.
He said for the family making $40,000, they would get $720 back in their pockets by not being taxed on the first $12,000.
Senate Bill 394 – Lower Tax Rates for a Stronger NC Economy and Senate Bill 677 – Corporate Income Tax Reduction and Reform
The Senate discussed two different Senate tax reform bills in Senate Finance committee Thursday.
Sen. Clodfelter said the effort was a consensus attempt to update a 75 year old tax plan.
“It is an attempt to fix an antiquated, outdated tax code,” he said.
The bill would bring the individual and corporate income tax rate to 5.95 percent with the franchise tax decreasing to $1.25 per $1,000. Also, the bill would broaden the sales tax base to include services and would reduce the sales tax rate to 4.5 percent, Clodfelter said.
Sen. Rucho said the plan was a way to transition to one day having a zero income tax rate “to make North Carolina the competitive state”.
But he said it was important that the new tax reform plan got rid of all the loopholes from the previous plan.
“There aren’t special groups that are getting special consideration at the expense of the people,” he said.
Rucho said even though there are television commercials trying to keep some of these loopholes in place, it is important to keep the tax plan as simple as possible.
“If we treat everybody the same, if everybody’s equally handled by the Department of Revenue and the tax policy what this does is it puts more money in the people’s pockets,” he said.