Legislative leaders are floating a proposal to increase the standard deduction — or what Sen. Bob Rucho, R-Mecklenburg, calls the “zero bracket” — on North Carolina income taxes, a move that could eliminate state income taxes for tens of thousands of taxpayers.
Barry Boardman, chief economist at the General Assembly, told the legislature’s Revenue Laws Study Committee on Tuesday that a $2,000 increase in the standard deduction for married taxpayers filing jointly would mean 70,000 to 75,000 current North Carolina taxpayers no longer would owe income taxes.
The change would reduce state revenues by an estimated $195 million to $205 million per year, Boardman said.
Rucho, one of the co-chairmen of the committee, said after the meeting he plans to push for the change in the upcoming short session of the General Assembly, which begins April 25.
“A standard deduction tends to help out significantly the middle-income people,” Rucho said.
He said making up for the lost revenue should not be a major problem, and that allowing taxpayers to keep more of their money could help boost the state’s economy.
“It’s roughly $200 million, the lion’s share will be focused on people going from $70,000 or less,” Rucho said, commenting on the income levels which would benefit most from the proposed change. “That will be another $200 million — at least — driven into the economy for purchasing goods and services that they want.”
Sen. Joel Ford, D-Mecklenburg, was a bit more cautious about the proposal.
“It sounds good on paper, but like any tax policy proposal, the measuring of the fiscal impact is also important,” Ford said after the meeting. “I’m all for tax relief for working families. I want to balance that with meeting the needs and obligations of the state.”
Ford said the key question is what budget item gets sacrificed to pay for it.
“It’s going to have to come from somewhere,” Ford said. “Are you asking me to pull that revenue stream out of the budget that could go for teacher raises and benefits? The answer to that question is no.’’
However, Ford said with the right spending priorities, he could support increasing the standard deduction. “If you can prioritize and meet the needs of this state and still provide working class tax relief, sign me up,” Ford said. “But don’t ask me to sacrifice raises for school teachers, or other important state service deliveries.”
If approved, the standard deduction for married taxpayers filing jointly would increase from $15,500 to $17,500, Boardman said. For single taxpayers, it would increase from $7,750 to $8,750. For head-of-household taxpayers, it would increase from $12,400 to $14,000, he said.
Boardman said a couple with an adjusted gross income of $43,916 would see a $115 reduction in state income taxes owed if the change took effect.
Boardman said that increasing the standard deduction primarily would benefit middle- and lower-income taxpayers because taxpayers with higher incomes usually itemize their deductions.
Seventy percent of the 4.3 million tax returns filed in North Carolina use the standard deduction, Ford said. The remaining 30 percent itemize.
The committee took no action on Tuesday. However, the matter could come back for discussion March 8, the committee’s next scheduled meeting date.