The House has passed landmark legislation that cuts income tax rates for North Carolina’s taxpayers — and replaces the existing convoluted system with a simple and fair flat tax. The plan also lowers state sales tax rates while broadening the base of covered services. It’s estimated that the House’s tax reform plan will save taxpayers $1.6 billion over the next five years.
North Carolina’s outdated and burdensome tax code has long been a drag on our state’s potential for economic growth. Our unemployment rate is the fifth-highest in the nation and state income taxes are higher than in any other surrounding state. The sponsors of House Bill 998 — The Tax Reduction and Simplification Act — believe that a simpler tax code with lower rates will help us be more competitive in the service-based economy of the 21st Century. The current tax code dates from the Depression-era 1930s, when agriculture and manufacturing were our state’s primary industries.
House Bill 998 is the next step in a bold economic revitalization program which the legislature began last session when it enacted a $1 billion tax cut; its work also continues this year by tackling the state’s massive Unemployment Insurance Debt, repealing the Death Tax and laying the groundwork for significant Regulatory Reform. These are all efforts designed to free up capital and spur job creation again in North Carolina.
The legislation accomplishes several things. Starting next year, the Tax Reform Plan modifies the current tax code in the following ways:
- Replaces the tiered system of personal income tax rates (6.0%, 7.0% or 7.75%) with a Flat Tax, lowering the rate to 5.9%. The plan continues to protect our most vulnerable citizens by retaining for them an effective personal income tax rate of 0%;
- More than doubles the child credit for low- and middle-income taxpayers, from $100 per child to $250 per child for any family making less than $100,000;
- Doubles the size of the standard deduction, aimed at helping low- and middle-income earners. This would exempt the first $12,000 of personal income from taxation (currently, income is taxed starting with first dollar earned);
- Continues to allow taxpayers to deduct local property taxes, mortgage interest payments and charitable contributions — but caps the mortgage interest and property tax deductions to a combined $25,000. There remains no cap on the charitable contributions that taxpayers may deduct.
- Protects senior citizens and working families by keeping existing exemptions for food, social security and medication;
- Reduces the overall sales tax rate, while expanding the tax base. This is accomplished by adding a limited number of transactions that would now be subject to the sales tax, including warranties, service contracts and the delivery, installation or repair of tangible personal goods (such as dishwashers or lawn mowers). The expansion in coverage would apply only to industries that are already setup to collect these taxes.
- Reduces the corporate tax rate by 1.5% over a five year period;
- Reduces the business franchise tax rate by more than 10% (a franchise tax is not a tax on income — it is an additional tax on any corporation that conducts business in North Carolina).
The House Tax Reform Plan is a major step in transitioning North Carolina from a reliance on the unstable income tax to a consumption-based revenue generating system; that is, collecting revenue when it is spent and not when it is earned.
HB998 passed its second reading on Friday, June 7 and is expected to receive final approval in the House on Monday, June 10, after which it will be sent to the Senate for consideration in that body. Members of both the House and Senate will then debate the merits of their respective plans to settle on a final proposal that Governor Pat McCrory will sign into law. The Governor has indicated his support of the legislature’s efforts to reduce tax rates, increase simplicity and efficiency, and make the state a more attractive place to create jobs and do business.
To examine some typical taxpayer scenarios under the House’s Tax Reform Plan, please click here. The numbers were compiled by the General Assembly’s non-partisan Fiscal Research Division and sales tax estimates are based on US Consumer Expenditure Survey data).