The state House, during a rare Friday session, gave its initial approval to a tax reform bill, taking a giant step toward fulfilling a campaign promise.
“We have talked about tax reform for decades,” said House Majority Leader Edgar Starnes, R-Caldwell. “Until today, it’s been nothing more than just that, talk.”
The bill passed the House by a 72-32 vote, with one Democrat — Rep. William Brisson, D-Bladen — joining 71 Republicans in voting for the bill. Sixteen House members were absent for Friday’s vote.
A statement from House Speaker Thom Tillis, R-Meckenburg, said the measure would replace a tax code “that was built on a 1930s population model that has subjected North Carolinians to the highest income taxes in the Southeast.”
The measure (House Bill 998) would reduce personal and corporate income tax rates while expanding the sales tax to include some services, such as repair work, maintenance, and installation of tangible personal property. The proposal would amount to a tax cut of more than $300 million over the next two fiscal years.
The passage is a stark turnaround from the direction the bill had taken two days earlier. Wednesday morning, the House Appropriations Committee refused to consider the bill. It had been sent to that committee after the House Finance committee removed a $25,000 cap on itemized deductions for mortgage interest, property taxes, and charitable contributions. Sponsors of the bill said such a move would benefit very few people while digging a $525 million hole in the budget over the next fiscal year.
Republican House members huddled in a closed caucus, and when a revised version of the bill came out, the cap on mortgage interest and property taxes was reinstated.
However, the bill puts no cap on charitable deductions.
The bill also did away with an earlier provision phasing out a $50,000 tax deduction for self-employment and small-business income. The version passed by the House eliminates that deduction beginning with the 2013 tax year.
GOP supporters fought back Democratic claims that the tax breaks contained in the bill would primarily benefit the wealthy, requiring lower and more moderate-income taxpayers to pay more in taxes than they currently pay.
“This is a millionaires’ tax cut bill,” said Rep. Paul Luebke, D-Durham.
“It’s a tax increase on 95 percent of North Carolinians,” said House Minority Leader Larry Hall, D-Durham, alluding to a report put out by the left-leaning N.C. Budget and Tax Center. “That is just a fact,” Hall said.
The General Assembly’s Fiscal Research staff said that the Budget and Tax Center assessment “is not accurate” with respect to the House tax reform bill that was passed Friday. Instead, Fiscal Research produced a study showing that virtually all households would get a net tax cut from the bill, though the amount of the tax relief varied according to household size and income.
Rep. Nelson Dollar, R-Wake, took a stab at Democratic lawmakers opposing the plan. “They’re not accustomed to cutting taxes,” Dollar said.
Rep. David Lewis, R-Harnett, the sponsor of the bill, said it would benefit North Carolina families.
“The working families of North Carolina will have more dollars in their pockets,” Lewis said. “Two-thirds of North Carolina tax filers will see an average income tax reduction of 20 percent.”
Lewis went on to say that he believed the 5.9 percent flat income tax rate was fair. “It does not penalize those who are trying to make more and advance themselves in the economic world,” Lewis said.
Republicans defeated three Democratic amendments that sought to increase tax rates on upper-income earners on procedural moves. All three were tabled.
The tax reform plan includes the following components:
• Lowers the income tax rate to 5.9 percent. Currently, the income tax rate varies from 6 percent to 7.75 percent, depending on income.
• Eliminates personal exemptions.
• Doubles the standard deduction for most filers and expands that deduction even more for the rest. For example, the standard deduction for married couples filing jointly would increase from $6,000 to $12,000. For single taxpayers and married taxpayer filing separately, it would increase from $3,000 to $6,000. For head-of-household taxpayers, it would more than double, increasing from $4,400 to $9,600.
• Eliminates the deduction for severance wages.
• Increases the child tax credit from $100 to $250 for taxpayers with an adjusted gross income of $100,000 or less. Those making more than $100,000 would get a child tax credit of $125.
• Reduces the corporate income tax rate from 6.9 percent to 5.4 percent over five years.
• Repeals the gross receipts franchise tax on electricity, but makes electricity subject to the combined state and local sales tax rate. The plan makes a similar change in the way piped natural gas is taxed.
• Repeals a gross receipts privilege tax, but imposes a sales tax, on live entertainment and movies. Current exemptions from the gross receipts tax would be maintained under the sales tax.
• Expands the sales tax to include repair, maintenance, and installation of tangible personal property. Service contracts also would be subject to the sales tax. Unlike a previous version of the bill, the one passed Friday by the House would not lower the local sales tax.
• Keeps the sales tax exemption for food and prescription drugs.
• Repeals the Energy Star sales tax holiday.
The House bill is one of three tax reform proposals getting consideration in the General Assembly this year. Two others — one eliminating income tax exemptions while expanding the sales tax to include all services (Senate Bill 677), and one billed as a consensus tax reform bill (Senate Bill 394) — are under review in the Senate.
A final vote on the House tax reform bill is scheduled for Monday night.
Barry Smith (@Barry_Smith) is an associate editor of Carolina Journal.