News: CJ Exclusives

Budget Deal Includes New Round of Tax Reform

Deal would reduce income taxes, expand sales tax base

RALEIGH — State taxpayers will pay $400 million less over the next two years if lawmakers pass a $21.735 billion state budget deal announced Monday by legislative leaders. The 2016-17 state budget also expands the sales tax base to include more repair and service work to help offset the tax rate reductions.

“I think you’ll see strong votes” favoring the budget in both the House and Senate, said Senate leader Phil Berger, R-Rockingham.

House Speaker Tim Moore, R-Cleveland, said he believes Gov. Pat McCrory “will very quickly embrace it and sign it into law.”

The measure builds on a series of rate cuts and tax streamlining put into effect two years ago.

It cuts the personal income tax rate to 5.499 percent beginning in 2017, a dip from the current 5.75 percent rate, Berger said in a joint news conference with Moore. They were surrounded by House and Senate budget conferees who have worked for weeks on a budget that was due June 30.

The budget will increase individual exemption in 2016, “ensuring taxpayers married filing jointly pay no state personal income tax on their first $15,500 of income,” Berger said. That is up from the current $15,000 of income exempted from those filers.

And the budget “encourages job creation and private investment in North Carolina by moving to calculate corporate income taxes based on a single sales factor over the course of three years,” Berger said.

The bill also restores full tax deductions for medical expenses, without a cap, to all North Carolinians.

Berger does not share McCrory’s concerns that expanding the sales tax base could hurt low- and middle-income people, saying “the overall package represents a net tax cut for the people of North Carolina,” and will be particularly beneficial for people at the lower end of the income scale.

Past budgets were “overly dependent on income taxes, and so when we had problems with the overall economy, that’s when you saw those wild swings” in tax revenue, Berger said. He believes sales taxes are a more stable source of revenue.

Some installation and repair services would now be taxed. Berger noted retailers that service goods they sell collect taxes only on retail sales.

Berger said businesses that do not sell products to retail consumers (and currently do not collect sales taxes) would not be covered by the expanded sales tax.

Moore said by limiting the sales tax expansion to companies already taxed on retail sales of products, no additional companies would be forced to become tax collectors for the state.

The new revenue from the expanded tax base would help to support education and economic development in counties with “insufficient local tax dollars,” Berger said. “The additional local revenue must be used to support public schools, community colleges, or economic development in those counties.”

Some of that money would go to the state, and some to the counties. Local sales tax revenue would continue to be divided, with 75 percent going to the county where the sale takes place, and 25 percent based on the county’s population, “ensuring that no local government will lose revenue under those changes,” Berger said.

There were attempts during the session to alter the allocation formula to shift more sales tax dollars to rural counties.

Moore said budget negotiators tried to address the matter in a way that helped rural counties “but not in a way that hurt the urban counties, and we’ve actually found a way to do that. This will cost no county any money. There are truly no losers in this plan.”

Berger said he is not aware of any new provision in the budget that expands the authority of local governments to impose sales taxes.

The single sales factor is a complex mechanism that 26 states now employ, including Virginia, Georgia, and South Carolina. Instead of North Carolina’s traditional dependence on corporate taxes based on a mix of property, payroll, and sales variables, a single sales factor would base tax calculations on sales revenue, excluding property and payroll.

Berger’s office calculated the cost of such a switch at $75 million when discussing the proposal in March.

Moore said the budget provides $225 million over the next two years to begin the process of restructuring the state’s Medicaid program, but a separate bill is being prepared on the reform framework. The reform bill language “has really been agreed to at this point,” and is likely to be taken up next week.

Money was included in the budget bill for a government budget transparency web site budget transparency website beginning in 2015-16 that would require all state agencies, counties, cities, and local education entities to post their spending data and update the information regularly.

The budget also would raise fees at the Division of Motor Vehicles for the first time in more than a decade. Berger said that would help offset a gas tax reduction passed earlier this year, though some viewed that action as a gas tax increase.

The budget would not extend the state’s 35 percent renewable energy investment tax credit, due to sunset at the end of 2015, “and there is no plan to extend it,” Berger said.

Dan E. Way (@danway_carolina) is an associate editor of Carolina Journal.

Editor’s note: This story was edited after initial publication.