North Carolina’s tax reform package, cutting the personal income tax rate, is the most significant plan likely to be approved in 2013, an analyst with a national tax reform organization said Tuesday.
Patrick Gleason, director of state affairs at Americans for Tax Reform, spoke to the reduction in the top marginal income tax rate of 7.75 percent that would be drop in 2015 to 5.75 percent
“North Carolina, with a 25 percent reduction in the top rate, pretty much blew the other states away,” Gleason said. Gleason and Elizabeth Malm, an economist with the nonpartisan Tax Foundation, said that North Carolina ranks at the top of the nation in magnitude of tax reforms this year.
Malm said the changes would make North Carolina’s tax code friendlier for business, jumping the Tar Heel State from 44th to 17th in the Tax Foundation’s State Business Tax Climate Index.
That index takes into account personal and corporate income taxes, along with sales, unemployment insurance, and property taxes.
The compromise tax reform package announced Monday by GOP Gov. Pat McCrory and General Assembly leaders won initial passage in both legislative chambers Tuesday. Final approval could come today. Then it would be sent to McCrory.
“This is the biggest one we’ve seen this year,” Malm said, referring to amount of money that would stay in taxpayers’ pockets instead of going to the state as a result of the proposal.
“Even though [the plan appears] modest, it looks like it’s over $700 million in tax cuts,” Malm said.
Kansas, which approved a tax reform package last year, is the only other state that came close, Malm said.
“I think North Carolina is the big one in the South,” Malm said. Malm thought it was “a pretty big deal” that the North Carolina reform plan goes from the current three-tiered marginal rate to one flat rate.
The plan would eliminate the personal income exemption, but increase the standard deduction. The standard deduction would be $15,000 for married taxpayers filing jointly, $12,000 for heads of household, and $7,500 for single taxpayers and married taxpayers filing separately.
Unlimited itemized deductions for charitable contributions would be allowed, however mortgage interest and property tax deductions would be capped at $20,000.
The corporate income tax rate, currently at 6.9 percent, would decrease to 5 percent by 2015. It could drop as low as 3 percent by 2017 if state revenues met or exceeded projections.
The back-to-school and Energy Star sales tax holidays would be eliminated. Sales taxes would be applied to service contracts and increased for manufactured and modular homes. It also would be modified on energy.
Gleason said the improved business tax climate could pay dividends in improving the state’s economy.
“Small businesses and large companies across North Carolina are going to see a significant increase in their job-creating capacity,” Gleason said. “It’s a big step in the right direction. This final deal represents a huge improvement over the current tax code.”
During floor debate Tuesday, Republican supporters acknowledged that the plan was the first step in what they hope will be a series of tax reform proposals.
“Does it do everything that we really want it to? No,” said Sen. Bob Rucho, R-Mecklenburg. Rucho, co-chairman of the Senate Finance Committee, said he hoped that the bill was the first step toward a tax code that would have a 0 percent personal income tax rate.
Democrats weren’t as happy about the proposal. “I really don’t see it as broad-based tax reform,” Sen. Floyd McKissick, D-Durham, said.
Sen. Josh Stein, D-Wake, also criticized the package for cutting revenues instead of leaving them level.
The House approved the bill by a 77-38 vote. The Senate approved it 32-17.
Barry Smith (@Barry_Smith) is an associate editor of Carolina Journal.