We have a new report up on a recent bill proposed in the North Carolina Senate that would continue to build on the state’s successful 2013 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. reform. From the report:
In recent months, the North Carolina House has responded to calls from Governor Pat McCrory to renew tax incentive programs with a bill that allocates $45 million to Job Development Investment Grants (JDIG). On June 10th, the Senate responded with a bill that makes changes to the existing tax incentive scheme, but also includes numerous broad-based reforms as well.
The broad-based reforms in the Senate package include:
- a reduction in the 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. rate from 5.75 percent to 5.5 percent by 2016,
- the reinstatement of federal deductions,
- an increase in the standard deductionThe standard deduction reduces a taxpayer’s taxable income by a set amount determined by the government. It was nearly doubled for all classes of filers by the 2017 Tax Cuts and Jobs Act (TCJA) as an incentive for taxpayers not to itemize deductions when filing their federal income taxes. from $7,500 to $9,250 by 2020,
- a decrease in the franchise tax rate from 0.15 percent to 0.1 percent,
- a reduction in the corporate rate to 3 percent by 2017, and
- moving the state to a single sales factor corporate tax apportionmentApportionment is the determination of the percentage of a business’ profits subject to a given jurisdiction’s corporate income or other business taxes. U.S. states apportion business profits based on some combination of the percentage of company property, payroll, and sales located within their borders. method.
Revenue offsets in the Senate package include: an expansion of 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 to manufactured and modular homes, aircrafts and boats, and purchases for nonprofit organizations that currently enjoy an exemption.
In whole, the approach the Senate has adopted is a noteworthy continuation of the positive tax reforms in the North Carolina tax code over the past few years. While the plan incorporates costly economic development incentives and also includes geographical redistribution in the local sales tax code, those gripes take a back seat to robust reforms in the individual, corporate, and franchise tax systems.
Check out the full report, including how the plan would improve North Carolina’s State Business Tax Climate Index ranking, here.
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