News: CJ Exclusives

House Would Replace Graduated Income Tax With Flat Tax

GOP proposal also would lower sales tax, broaden base to cover some services

House Republicans Thursday unveiled their tax modification plan, a move that would eliminate the progressive income tax rate in favor of a flat tax.

It also would lower the sales tax rate slightly and broaden the sales tax to include repair, maintenance, cleaning, and installation services, and service contracts. Unlike a competing tax plan presented by Senate Republicans, it would not expand the sales tax base to cover all services.

The plan would establish a flat 5.9 percent flat rate for personal income tax. Currently, the tax rate varies from 6 percent to 7.75 percent, depending on income.

The corporate income tax would be reduced from 6.9 percent to 6.75 percent.

The combined state and local sales tax rate would be reduced from 6.75 percent to 6.65 percent, with the reduction coming at the local sales tax level.

Republican Gov. Pat McCrory, who has called for tax reform, had a positive response to the House GOP plan.

“I am encouraged by the bill details I have seen in the House plan on reforming North Carolina’s tax code,” McCrory said in a statement. “The House plan combined with other proposals provides several options that will allow us to develop competitive tax reform which is fair to North Carolina families, attracts job creators, and provides certainty that will encourage home-grown businesses to expand. My goal is to work with leaders in both the House and Senate to implement reform that is financially sound, fair and rewards productivity, savings, and investment.”

John Hood, president of the John Locke Foundation, said that with tax plans from both chambers on the table, it’s time to bargain and hammer out a plan.

“The two sides really aren’t that far apart philosophically,” Hood said. “They differ on practical considerations. For taxpayers, the only truly impractical outcome here would be for legislators not to come to agreement.”

Hood notes that the House plan would save taxpayers about $485 million by 2015-16, whereas the Senate proposal anticipates a net savings to taxpayers of about $1 billion over three years.

The bill would repeal gross receipts franchise taxes on electricity and repeal excise taxes on piped natural gas in favor of making them subject to the full state and local sales tax rate.

Similarly, gross receipts taxes on live entertainment and movies would be repealed, with sales taxes being imposed on those entertainment events. The bill would repeal the Energy Star sales tax holiday.

Personal exemptions would be eliminated on the personal income tax. However, the standard deduction would be increased. For married couples filing jointly, the standard deduction would go from $6,000 to $12,000. The head of household standard deduction would increase from $4,400 to $9,600. The standard deduction for single filers and for married couples filing separately would go from $3,000 to $6,000.

The Senate is expected to fill in details of its tax plan as early as next week.

Barry Smith (@Barry_Smith) is an associate editor of Carolina Journal.