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McCrory, Legislative Leaders Announce Historic Tax Reform

Single rate, reduced exemptions signal biggest change in tax policy since Depression

GOP Gov. Pat McCrory called a tax reform compromise reached with legislative leaders “another historic step to ensure what I refer to often as a Carolina comeback.”

House Speaker Thom Tillis, R-Mecklenburg, said it was proof that that reports of the death of cooperation between the House and the Senate “have been grossly over-exaggerated.”

Senate President Pro Tem Phil Berger, R-Rockingham, called the agreement “a historic day for North Carolina.” Tillis and Berger noted it’s the first time since the Great Depression that state leaders have come together to make fundamental reforms in the state’s tax structure.

Meantime, the nonpartisan Tax Foundation, based in Washington, D.C., said the reform plan announced Monday would leapfrog North Carolina’s business tax climate from 44th in the nation to 17th. North Carolina would trail only No. 15 Tennessee among neighboring states in its tax climate ratings.

The three leaders used the backdrop of the Old House chamber in the historic Capitol Monday to announce the agreement of the tax reform package that has consumed months in the negotiating process and could become law within days.

The politics and policies of the past few years — of the last decade — have not put people in jobs,” McCrory said.
The highlights of the package include establishing a flat rate for personal income tax. That rate would be reduced to 5.8 percent in 2014 and 5.75 percent in 2015 and thereafter. Currently, the rate is between 6 percent and 7.75 percent depending on income.

The personal income exemption of $2,500 (for most taxpayers) would be eliminated; however, the standard deduction would be increased to $15,000 for married couples filing jointly (currently $6,000), $12,000 for heads of household (currently $4,400), and $7,500 for single taxpayers and married taxpayers filing separately (currently $3,000).

Itemized deductions for mortgage interest and property taxes would be capped at $20,000. Unlimited charitable deductions would continue to be allowed.

The corporate tax income rate would decrease from the current 6.9 percent to 6 percent in 2014 and 5 percent in 2015. The rate would decrease by 1 percentage point in each of the two succeeding years if certain tax collection triggers are met.

The corporate income tax would decrease to 4 percent in 2016 if during the 2014-15 fiscal year General Fund tax collections exceeded $20.2 billion. It would decrease to 3 percent in 2017 if during the 2015-16 fiscal year General Fund tax collections exceeded $20.975 billion.

The corporate income tax triggers alleviate a concern raised by McCrory, who last week said he wanted to protect the integrity of the budget and make sure that the tax code would raise enough revenues to pay for essential state services. The triggers also would protect lawmakers and the governor in case the state experienced a recession.

There’s no widespread expansion of the sales tax, as had been included in previous tax reform proposals. Sales taxes would be extended to cover service contracts, but would not be charged to repair, maintenance, and installation of tangible property. Attractions for which admission is charged would be subject to the sales tax also.

Refunds for nonprofit organizations would be capped at $45 million, which in effect is unlikely to affect large nonprofits, including large hospital networks.

The state gasoline tax would be capped at 37.5 cents for per gallon two years. The estate tax would be repealed.

House Democratic Leader Larry Hall, D-Durham, didn’t react too kindly to the news that a deal had been reached.

“All the Republicans offered today is more of the same,” Hall said Monday in a statement. Their plan gives huge tax breaks to out-of-state corporations and millionaires while balancing those breaks on the backs of the middle class and working families.”

Hall continued: “Real tax reform would focus on closing special interest loopholes and establishing a tax code that treats all of our hardworking taxpayers fairly. Instead, Gov. McCrory and the Republicans chose to make even deeper cuts to our schools just to ensure that the wealthiest individuals and corporations in North Carolina will receive huge tax breaks. North Carolina needs a tax code that protects the middle-class and ensures everyone pays their fair share. The Republican proposal fails this basic test.”

A spokesman for the N.C. Association of Realtors also said the organization did not back the cap placed on mortgage interest and property tax deductions, saying it would hurt the real estate business.

“It’s a bad time to place restrictive tax policies on the real estate economy,” said Mark Zimmerman, chairman of the association’s legislative committee. “We are just emerging from the worst recession since the Great Depression. The North Carolina Association of Realtors believe we should be encouraging homeownership and private property rights — not adopting legislation that will be a de facto tax increase on homeowners.”

A review by Elizabeth Malm, an economist at the Tax Foundation, found that the reform plan would move North Carolina from 44th to 17th in its State Business Tax Climate Index.

“Though not as comprehensive as earlier reform proposals, the income tax rate reductions are a good move, as is the flattening of the individual income tax,” according to Malm’s analysis.

A review of scenarios studied by the General Assembly’s nonpartisan Fiscal Research Division found that taxpayers in every segment of the income spectrum would pay lower taxes under the plan.

The division also found that the tax reform package would result in a net decrease in $86.6 million in revenues for the current 2013-14 fiscal year. Or, as Berger said during Monday’s press conference, taxpayers would keep that amount in their pockets.

The net effect decrease in state revenues would increase to $649.8 million in the 2017-18 fiscal year.

While the compromise has been endorsed by both the House and Senate GOP caucuses, it still must get the approval of the full membership of both chambers before going to McCrory for his signataure.

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