After months, really years, of debate, the Governor and leadership in the House and the Senate reached agreement on a tax reform bill. Broadly, it is safe to say that the soon-to-be new law will simplify the tax code and will cut taxes for most taxpayers.
Knowing that the devil is in the details, what follows is a broad description of the details. Please contact me if you have any questions.
Part I: Individual Income Tax Changes
- Broad base, flat rate of 5.8% in 2014 and 5.75% thereafter;
- Eliminates all deductions, exemptions, and credits except as follows: Income not allowed to include in tax base by federal law or court action; Social security income; Interest on certain bond obligations;
- Allowed to deduct the standard deduction amount or a NC itemized deduction amount, Standard deduction amount increased, and Itemized deduction amount limited to charitable contributions deducted for federal purposes (no State cap) and mortgage interest + property taxes paid on real estate (capped at $20,000);
- Enhanced child credit for Adjusted Gross Income (AGI) under $40,000 Married Filing Jointly (MFJ) from $100 per child to $125 per child.
Part II: Corporate Income Tax Changes
- Broadens base by eliminating all credits except the one for investing in major recycling facilities;
- Reduces rate from 6.9% to 6% in 2014, and to 5% in 2015;
- Provides a trigger for possible rate reduction in 2016 to 4% and in 2017 to 3%;
- Extends tax credit for research and development two years, from January 1, 2014, to January 1, 2016.
Part III: Sales Tax Changes
- Increases the tax rate on modular homes and manufactured homes to the State general rate of 4.75%, effective January 1, 2014 (currently 2.5% and 2% with a $300 cap per article, respectively);
- Repeals sales tax exemption for nutritional supplements sold by a chiropractor, meals served in higher educational institution facilities, and newspapers, effective January 1, 2014;
- Requires farmers to meet an annual income threshold from farming activities of $10,000 to qualify for farm-related sales tax exemptions, effective July 1, 2014;
- Repeals sales tax exemption for certain bakery items sold in a bakery thrift store and the sales tax holiday for school items and energy star products, effective July 1, 2014;
- Caps the sales tax refund allowed to nonprofit entities at $45 million (State and local), effective July 1, 2014;
- Extends the sales tax refund for air passenger carriers and motorsports two years, from January 1, 2014, to January 1, 2016.
Part IV: Electricity and Piped Natural Gas
- Repeals the gross receipts franchise tax on electricity and the excise tax on piped natural gas, effective July 1, 2014;
- Requires Utilities Commission to change rates charged by these utilities accordingly;
- Includes these utilities in the State sales tax base and taxes them at the combined general rate of 7%, effective July 1, 2014;
- Replaces the current tax-sharing of revenues with cities with a distribution of part of the sales tax collected on these items.
Part V: Entertainment Activities
- Repeals the gross receipts franchise tax on live entertainment and movies, effective January 1, 2014;
- Includes admission charges to a live event, a movie, or an attraction to the State and local sales tax, effective January 1, 2014;
- Exempts from sales tax admission charges to elementary or secondary school events, agricultural fairs, limited nonprofit events, youth athletic contests, and State attractions.
Part VI: Service Contracts
- Defines a service contract as an agreement by which the provider agrees to maintain or repair tangible personal property;
- Includes service contracts in the State and local sales tax base, effective January 1, 2014;
- Exempts from sales tax an item used to fulfill a service contract and it exempts from sales tax a service contract for an item exempt from sales tax (except motor vehicles) and transmission, distribution or other network asset contained on utility-owned land, right-of-way, or easement.
Part VII: Eliminate Estate Tax
- Repeals estate tax, effective January 1, 2013, and applicable to the estates of decedents dying on or after that date.
Part VIII: Cap Excise Tax on Motor Fuel
- Caps the excise tax on motor fuel at 37.5 cents/gallon, effective October 1, 2013, until June 30, 2015.
The House took the first vote on the tax package today, and the motion to adopt the tax package passed by a vote of 77-38. There will need to be a second vote tomorrow.
Three issues seemed most important to Henderson County residents. First, nonprofit leaders, particularly with Pardee and Park Ridge, wanted to preserve the sales tax refunds for nonprofits. Second, the county and the municipalities wanted a tax neutral package as to counties and municipalities. Third, theaters and the Flat Rock Playhouse didn’t want to have to collect sales taxes on tickets.
With respect to sales tax refunds for nonprofits, the tax reform package continues refunds of sale taxes paid by nonprofits. Similarly, nothing changed with respect to counties and municipalities; the tax package is tax neutral as to counties and municipalities. However, the sale tax was extended to tickets sales at theaters and other productions, such as those put on by the Flat Rock Playhouse.
A broader discussion of the tax reform package will follow.