North Carolina Tax Reform Options: A Guide to Fair, Simple, Pro-Growth Reform

 
 
January 23, 2013

KEY PREVIOUS NORTH CAROLINA
TAX REFORM EFFORTS AND PROPOSALS

1921: Revenue Act of 1921

This major tax reform eliminated the state property tax (leaving it a strictly local tax), adopted an individual income and corporate income tax, and imposed a gasoline tax.

1933: Emergency Revenue Act of 1933

This major tax reform had the state assume fiscal responsibility for schools, roads, and prisons from the local governments. A temporary 3 percent sales tax was enacted, which was made permanent in 1939.

1951: The Sales Tax: Its History, Growth, Development, Problems, and Possibilities

Authored by Revenue Commissioner Eugene Shaw, this proposal recommended eliminating all exemptions except those constitutionally required (interstate sales, sales to government) and exempting inputs (sales of productive equipment and raw materials to farmers and manufacturers). The sales tax would also be extended to services.

1989: Tax Fairness Study Commission

This state panel made the following recommendations:

  • Sales Tax: Eliminate sales tax cap of $300.
  • Individual Income Tax: Conform to federal definition of income, retain the two tax brackets, increase tax credits for child care, elder care, and food purchases by low-income individuals to offset the sales tax.
  • Corporate Income Tax & Franchise Tax: Repeal unnecessary tax credits.
  • Other: Repeal the intangibles tax, increase penalties for tax evasion.

1991: Economic Future Study Commission

This state panel made the following recommendations:

  • Sales Tax: Restructure the sales tax to tax all goods and services purchased by individuals, exempt inputs and raw materials, and eliminate existing sales tax preferences on purchases by individuals for personal use.
  • Corporate Income Tax: Eliminate all special exemptions, deductions, and credits.
  • Other: Repeal the intangibles tax, expand the cigarette tax to non-tobacco products, limit state budget growth to economic growth, implement a rainy day fund of up to 5% of state expenses, permit local governments to enact a land transfer tax, consider enacting a state lottery.

2001: Efficiency & Loophole-Closing Commission

This state panel recommended, among other things, expanding the franchise tax to LLCs, taxing vending machine sales, and imposing sales tax on the sale of fertilizer and seed to non-farmers.

2002: Governor’s Commission to Modernize State Finances

This blue ribbon state panel made the following recommendations:

  • Sales Tax: Broaden the sales tax base to include food and services, but exempting business inputs; adhere to the Streamlined Sales Tax Agreement; have the state government collect local sales taxes.
  • Individual Income Tax: Conform to the federal definition of income; enact an Earned Income Tax Credit (EITC) for low-income taxpayers.
  • Corporate Income Tax & Franchise Tax: Retain the R&D tax credit but replace others with appropriated subsidies; adopt combined reporting; expand the franchise tax to pass-through entities; adopt a throwout rule; conform to the federal definition of income; consider returning to the three-factor apportionment formula.
  • Other: Shift Medicaid costs from counties to the state; establish a State-Local Relations Commission; review unemployment insurance tax laws; repeal unnecessary fees; maintain a rainy day fund of at least 8 percent.

2005: N.C. Budget & Tax Center—A 21st Century Revenue Plan

This organization made the following recommendations:

  • Sales Tax: Broaden the sales tax base to most services, candy, newspapers, and entertainment; lower rate to 3.25 percent.
  • Individual Income Tax: Add two new brackets on high-earners; increase the EITC.
  • Corporate Income Tax & Franchise Tax: Raise rate to 7.75 percent, revert to three-factor apportionment formula, adopt throwback rule, adopt combined reporting, repeal NOL deduction, and expand franchise tax to pass-through businesses.
  • Other: Raise cigarette tax, retain estate tax, and raise real estate transfer tax.

2006: State & Local Fiscal Modernization

This state panel recommended broadening the income and sales tax bases, and using the revenue to lower tax rates.

2005-2009: Institute for Emerging Issues—Financing the Future

This multi-year working group of stakeholders made the following tax system recommendations:

  • Reduce individual income tax and corporate income tax rates to competitive levels.
  • Use the federal definition of income.
  • Eliminate income tax deductions and credits.

2009: John Locke Foundation—Tax Reform in North Carolina

This organization made the following recommendations:

  • Replace the individual income tax with a “consumed income tax,” exempting all saving and investment from tax.
  • Repeal the corporate income tax.
  • Eliminate all targeted tax incentives.
  • Consolidate excise taxes into the sales tax at one rate.

2009: 21st Century Tax Rate Reduction & Modernization Plan (Senate)

This proposal, which ultimately did not pass, sought to raise revenue with the following changes:

  • Sales Tax: Expand base to digital products, repair services, entertainment, and information services; lower rate to 4 percent; exempt depreciable equipment purchases
  • Individual Income Tax: Lower all rates, create new zero bracket up to $10,000; conform to federal definition of income, exclude from federal AGI only EITC, child credit, mortgage credit (capped), charitable credit (capped), medical credit, and R&D credit.
  • Corporate Income Tax: Lower rates; adopt throwout rule; repeal all credits except R&D and targeted incentives.
  • Franchise Tax: Expand to LLCs.
  • Other: Increase excise taxes on beer, wine, alcohol, and tobacco.

What the Legislature ultimately enacted in 2009 was a temporary individual income tax surcharge, a temporary sales tax increase, expansion of the sales tax to digital purchases, increased excise taxes, and expanded tax credits. As one official said at the time, “What was enacted violated every principle and recommendation.”

2012: Civitas Institute—More Jobs, Bigger Paychecks

This organization made the following recommendations:

  • Sales Tax: Raise state rate to 6.5 percent; expand the sales tax base to all services taxed by at least one state, insurance premiums, residential leases, and lottery ticket sales; exempt business inputs; repeal preferential rates and exemptions.
  • Individual Income Tax: Repeal.
  • Corporate Income Tax: Repeal.
  • Franchise Tax: Repeal but replace with new 1.05 percent annual tax on business net assets (assets less retained earnings) by all forms of business, with a $500 minimum payment.
  • Other: Raise the real estate transfer tax to 1 percent.

Table 36: Common Themes in North Carolina Tax Reform Proposals

 

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