A tax reform package cleared a key committee Thursday and is headed for a House floor vote, possibly as early as today. The bill passed the House Appropriations Committee, the same committee that a day earlier failed to consider the proposal and put its fate in doubt.
“Under the plan, the working families of North Carolina will see more dollars in their pockets and our state will become more competitive in job creation,” said Rep. David Lewis, R-Harnett, the sponsor of the bill. “All North Carolinians get a personal income tax break.”
The bill approved Thursday would revise a change, prompted by Rep. Julia Howard, R-Davie, in Finance Committee earlier in the week. That change would have removed a $25,000 cap on itemized exemptions for mortgage interest, property taxes, and charitable contributions.
Instead, the Appropriations Committee decided to keep the $25,000 itemized deduction cap on mortgage interest and property tax for married couples filing jointly, but allow for unlimited itemized deductions for charitable contributions.
The plan would eliminate the current three-tiered tax rate for personal income tax in favor of a flat income tax rate of 5.9 percent. Currently, the rate varies from 6 percent to 7.75 percent, depending on income.
It also would lower the corporate income tax rate, which now stands at 6.9 percent. Over the next five years, the rate would drop to 5.4 percent. And it would broaden the sales tax to include some services.
The bill would lower the combined state and local sales tax rate in most counties from 6.75 percent to 6.65 percent.
“This plan puts North Carolina on track for further tax reform efforts in the future,” Lewis said.
Lewis spent much of the meeting going over the details of the plan to committee members eager for details.
Rep. Mickey Michaux, D-Durham, wanted to know what services would be covered under the expanded sales tax.
Lewis told him that it would include extended warranties, service contracts, and repairing or installing tangible personal goods.
“Currently, when you go to have your automobile repaired — or in my case, when you go to have your lawnmower repaired — the repair parts that are installed on your machine are taxed at the full rate, but the labor to install those parts is not taxed today,” Lewis explained. “These would be [taxed] under this plan.”
Lewis said that there would also be an expansion of the sales tax base for amusements and entertainment, calling the way the state taxes them now “a hodgepodge” method of taxing various events.
The Energy Star tax holiday, which exempts some energy-efficient appliances from the sales tax during the first weekend in November, would be repealed.
Michaux then asked about food and drugs.
“This bill keeps the vital exemptions on the sales tax for food and for drugs,” Lewis responded.
A legislative fiscal staff analysis of a similar version of the tax reform bill, which ran tax scenarios, determined that 80 percent of the households they studied would get a tax cut, compared to the current tax baseline. That includes virtually all families with incomes below $40,000.
Barry Smith (@Barry_Smith) is an associate editor of Carolina Journal.