Last night, further details on the agreement reached between Tar Heel legislators and Governor McCrory were released to the public. In addition to the provisions we reported on yesterday, the compromise plan will also make changes to the sales taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. . In particular, it will:
- Add service contracts to the sales taxA sales tax is levied on retail sales of goods and services and, ideally, should apply to all final consumption with few exemptions. Many governments exempt goods like groceries; base broadening, such as including groceries, could keep rates lower. A sales tax should exempt business-to-business transactions which, when taxed, cause tax pyramiding. base;
- Make manufactured and modular homes subject to state rate of 4.75 percent (rather than the 2 percent and 2.5 percent rates, respectively, to which these transactions are subject);
- Eliminate certain exemptions (nutritional supplements sold by chiropractors, certain newspaper sales, attractions exemption; meals sold in higher educational facilities; and certain bakery items);
- Eliminate multiple gross receipts franchise taxes, privilege taxes, and preferential sales tax rates and make those transactions subject to sales tax (electricity gross receipts taxA gross receipts tax is a tax applied to a company’s gross sales, without deductions for a firm’s business expenses, like costs of goods sold and compensation. Unlike a sales tax, a gross receipts tax is assessed on businesses and apply to business-to-business transactions in addition to final consumer purchases, leading to tax pyramiding. ; amusements and movies privilege taxes; preferential sales tax rates on manufactured and modular homes and electricity; gross receipts franchise tax on electricity; amusements gross receipts franchise tax; and piped natural gas excise taxAn excise tax is a tax imposed on a specific good or activity. Excise taxes are commonly levied on cigarettes, alcoholic beverages, soda, gasoline, insurance premiums, amusement activities, and betting, and typically make up a relatively small and volatile portion of state and local and, to a lesser extent, federal tax collections. );
- Eliminate sales tax holidays;
- Require an annual gross income requirement of $10,000 for farms to receive exemptions;
- Caps refunds for state and local sales tax paid by nonprofits at $45 million;
There are definite simplification benefits here. Charging multiple tax rates on different industries and transactions is non-neutral and it adds unnecessary complexity to the tax code. The expansion of the sales tax baseThe tax base is the total amount of income, property, assets, consumption, transactions, or other economic activity subject to taxation by a tax authority. A narrow tax base is non-neutral and inefficient. A broad tax base reduces tax administration costs and allows more revenue to be raised at lower rates. to certain services is far less comprehensive than we originally hoped, and it certainly isn’t as robust as Senator Rucho’s sales tax expansion to over 100 services. It also seems that multiple business inputs, which would have been added to the base under an early version of the Senate plan, have been excluded from the base. This is important because applying the sales tax to business inputs is distortive and leads to tax pyramidingTax pyramiding occurs when the same final good or service is taxed multiple times along the production process. This yields vastly different effective tax rates depending on the length of the supply chain and disproportionately harms low-margin firms. Gross receipts taxes are a prime example of tax pyramiding in action. .
We also have additional details on certain individual income taxAn individual income tax (or personal income tax) is levied on the wages, salaries, investments, or other forms of income an individual or household earns. The U.S. imposes a progressive income tax where rates increase with income. The Federal Income Tax was established in 1913 with the ratification of the 16th Amendment. Though barely 100 years old, individual income taxes are the largest source of tax revenue in the U.S. benefit programs. Namely, the existing retirement income benefit would be eliminated, as would the severance wage deduction. Multiple corporate and individual income tax credits that are currently scheduled to sunset would still be eliminated as planned (for full details on these, see page 3 of this comparison chart).
Actual legislation was posted on the NC General Assembly website this morning and can be found here.
WRAL News posted some handy reference materials this morning:
- Associated Press bullet list of tax changes
- Chart comparing House plan, Senate plan, and new agreement
- Tax liability scenarios for different tax filers
- Fiscal note
Once fully phased in in the 2017-18 fiscal year, the agreement would amount to a $727.8 million state tax cut. Local governments would see an increase in funding of $42.9 million in that same year.Share