RALEIGH — Tax reform moved a step closer to the finish line Tuesday as the Republican-led state Senate gave its tentative approval to its modified plan by a 32-15 margin. While it’s not clear whether Republican Gov. Pat McCrory backs the proposal, the GOP leader in the House says his Senate counterparts are moving in the right direction.
“We are making progress in our discussions on tax reform, as evidenced by the newest plan in the Senate that addresses some House concerns over taxing Social Security and charitable contributions,” House Speaker Thom Tillis, R-Mecklenburg, said in a statement. “The House Republican caucus will review the bill when it comes to our chamber, and we will continue to work with the Senate and the governor to address concerns that remain.”
The version of House 998 that won tentative approval Tuesday in the Senate would lower the personal income tax rate, phase out the corporate income tax, and expand the sales tax to a handful of services. The measure is scheduled for final approval today.
If that occurs, a majority of House members either would have to approve the plan as is or the chambers would need to forge another compromise. In either event, then they would need McCrory’s blessing. So far, the governor’s office has been silent on the proposal.
Mike Walden, an economist at N.C. State University, noted that the plan that passed the Senate was “crafted to be fairly close to the House version,” adding that it was much “less ambitious” than the plan originally discussed in the Senate.
Walden said that changes in the tax code of this magnitude would have a much more modest effect on the economy than proponents would suggest.
“I’m not saying it’s not right to do this,” Walden said. “I would not expect that these tax changes would lead to an economic explosion in the state.”
Walden continued, “If it makes the tax system simpler with fewer deductions and lower rates, then it makes it modestly helpful, with an emphasis on modestly.”
Senate Democrats opposed the proposal. Sen. Josh Stein, D-Wake, said the tax cuts in the proposal primarily would benefit wealthier taxpayers at the expense of the middle class.
Sen. Dan Blue, D-Wake, said the plan’s provision limiting sales tax rebates for nonprofits would put a “stranglehold” on some of the largest nonprofit hospitals, such as WakeMed Health and Hospitals in Raleigh.
“You guys are the last ones that I thought would punish success,” Blue said.
However, Senate leader Phil Berger, D-Rockingham, said the bill, with lower tax rates, would have a positive impact on business and job creation.
“You don’t have employees if you don’t have employers,” Berger said.
While the plan expands the sales to cover some services, such as repair work, cleaning, installation of products, and service contracts, it does not have a broad expansion to cover most professional services.
It would allow unlimited deductions from state income taxes for charitable contributions as well as deductions of as much as $15,000 for mortgage interest and property tax on real estate.
It would drop the personal income tax to a single rate of 5.75 percent. Currently, the rate is between 6 percent and 7.75 percent, depending on income. It would also phase out the corporate income tax, which is currently 6.9 percent, by 2018.
Barry Smith (@Barry_Smith) is an associate editor of Carolina Journal.