North Carolina Poised for Dramatic Tax Reform

June 07, 2013

Senate Plan Would Improve State’s Tax Climate Ranking from 44th to 13th Best 

Washington, D.C., June 7, 2013—North Carolina’s General Assembly is currently considering two reform plans that would both dramatically improve the state’s tax system and prospects for economic growth, according to a new analysis by the nonpartisan Tax Foundation. The bolder of the plans, currently before the state Senate, would skyrocket North Carolina’s ranking on the Tax Foundation’s State Business Tax Climate Index from a low of 44th place to 13th best in the nation. The House plan would move the state to 19th place.

“North Carolina’s tax system is in desperate need of reform,” said Tax Foundation economist Elizabeth Malm. “The system includes high individual income taxes, a corporate income tax that exceeds its neighbors’, and a sales tax base that excludes a large portion of transactions. By flattening and lowering individual income taxes, the system becomes fairer, simpler, and more neutral.”

The Senate is considering the “Tax Fairness Act of 2013,” which would:

  • Lower the individual income rate to a flat 4.5 percent;
  • Completely remove the personal exemption, standard deduction, and itemized deductions, though the taxpayer would pay no income tax on the first $15,000 of earnings;
  • Retain existing child credit, repeal the mortgage interest deduction and net business income deduction, remove other individual income tax carve-outs, and apply income tax to certain retirement income;
  • Reduce the corporate income tax rate to 6 percent and repeal several corporate tax credits;
  • Reduce combined state-local sales tax rate to 6.5 percent and broaden base to include most services, food, and prescription drugs; and
  • Repeal the estate tax.

“The Senate proposal is the most robust in terms of income tax base broadening,” said Malm. “It closes multiple tax expenditures in the individual and corporate income tax code that distort behavior, add unnecessary complexity, and require higher rates to compensate for a small tax base.”

House lawmakers are, at the same time, debating the “Tax Simplification and Reduction Act,” which would:

  • Collapse the state’s three individual income tax brackets into one and lower the rate to 5.9 percent;
  • Eliminate the personal exemption, cap local property tax and mortgage interest deductions, increase the standard deduction and child credit, limit the generous $50,000 deduction for net business income, and repeal charitable contribution credit for non-itemizers and severance wage deduction;
  • Lower the corporate income tax to 5.4 percent;
  • Reduce the franchise tax to $1.35 from $1.50 per $1,000 of the tax base; and
  • Lower the combined state-local sales tax from 6.75 percent to 6.65 percent while broadening the tax base to include certain services.

A detailed list of changes can be found in Table 1 in the full report. As a supplement to this legislation, House lawmakers have already passed a bill that would eliminate the state estate tax which now awaits action in the Senate.

Tax Foundation Fiscal Fact No. 373, “North Carolina Considers Impressive Tax Reform Options” by Elizabeth Malm and Scott Drenkard, is available online.

The Tax Foundation is a nonpartisan research organization that has monitored fiscal policy at the federal, state and local levels since 1937. To schedule an interview, please contact Richard Borean, the Tax Foundation’s Communications Associate, at 202-464-5120 or borean@taxfoundation.org.

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