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North Carolina House, Senate, and Governor Announce Tax Agreement

3 min readBy: Liz Malm

Today at 4:00 pm EST, North Carolina lawmakers announced that an agreement had finally been reached in the state 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. debate—a process that’s been going on for months. Governor Pat McCrory, Senate President Pro Tempore Phil Berger, and House Speaker Thom Tillis all spoke at a press conference outlining early details of the plan. The agreement would make the following changes:

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.

  • Flatten and lower rate to 5.75 percent by 2015;
  • Increase 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. to $7,500 (for singles);
  • Allow full deductibility of charitable contributions;
  • Fully exempt Social Security income from state income tax;
  • Allow for certain itemized deductions (total of mortgage interest and property taxes paid would be capped at $20k); and
  • Retain current child credit of $100 for those earning $40k and increase credit to $125 for those earning under $40k.

Corporate Income TaxA corporate income tax (CIT) is levied by federal and state governments on business profits. Many companies are not subject to the CIT because they are taxed as pass-through businesses, with income reportable under the individual income tax.

  • Reduce rate to 5 percent by 2015;
  • If certain revenue targets are met, rate would decrease to 4 percent in 2016 and 3 percent in 2017.

Other Changes

  • Retain full sales tax refundA tax refund is a reimbursement to taxpayers who have overpaid their taxes, often due to having employers withhold too much from paychecks. The U.S. Treasury estimates that nearly three-fourths of taxpayers are over-withheld, resulting in a tax refund for millions. Overpaying taxes can be viewed as an interest-free loan to the government. On the other hand, approximately one-fifth of taxpayers underwithhold; this can occur if a person works multiple jobs and does not appropriately adjust their W-4 to account for additional income, or if spousal income is not appropriately accounted for on W-4s. for nonprofits;
  • Cap gasoline tax; and
  • Fully repeal estate taxAn estate tax is imposed on the net value of an individual’s taxable estate, after any exclusions or credits, at the time of death. The tax is paid by the estate itself before assets are distributed to heirs. .

During earlier discussions, lawmakers were having a difficult time coming to an agreement on the status 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. refund for nonprofits and the tax treatment of Social Security income. The former would be fully retained and the latter would remain fully exempt for the state income tax. Senator Berger also noted that projections show local governments will likely see increased funding, implying that future property taxA property tax is primarily levied on immovable property like land and buildings, as well as on tangible personal property that is movable, like vehicles and equipment. Property taxes are the single largest source of state and local revenue in the U.S. and help fund schools, roads, police, and other services. increases no longer need to be a concern.

Unfortunately, there is virtually no reform to the state’s existing franchise tax ($1.50 per $1,000 of 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. ), which is complicated, non-neutral, and doesn’t have a cap. More comprehensive tax reform would have made the tax more neutral by levying it on all limited liability companies and capping the amount that can be paid (similar to the most recent Senate plan). Even better, lawmakers could fully repeal the tax.

The latest plan also doesn’t do any corporate income tax base broadeningBase broadening is the expansion of the amount of economic activity subject to tax, usually by eliminating exemptions, exclusions, deductions, credits, and other preferences. Narrow tax bases are non-neutral, favoring one product or industry over another, and can undermine revenue stability. . There are multiple carve-outs in the North Carolina tax code that attempt to incentivize certain industries and activities (for a full list of these CIT tax benefits, see the Corporation Income Tax section, starting on page 29, of the North Carolina Biennial Tax Expenditure Report). These programs cut out large chunks of revenue, forcing the rate to be higher on firms subject to the tax. The film industry production expenses credit, for example, cost the state nearly $36 million in 2011. Other credits to incentivize job creation and “investing in business property,” among others, often don’t meet expectations and are expensive.

There wasn’t any mention of sales tax base expansion, either—something that was included in both the previous House and Senate plans to some degree. The House plan would have added service contracts, alteration, repair, maintenance, cleaning, and installation to the sales tax base. The Senate proposal would have only expanded the base to cover service contracts. Making a change such as this brings in additional revenue and increases neutrality between the goods and service markets.

Despite these minor criticisms, the plan would most definitely improve North Carolina’s State Business Tax Climate Index score. Currently, North Carolina ranks 44th in the country. The new agreement would move the Tar Heel State up to 17th best. Scores for other tax categories are found below:

Current Law

New Plan




Corporate Income



Individual Income






Unemployment Insurance






Though not as comprehensive as earlier reform proposals, the income tax rate reductions are a good move, as is the flattening of the individual income tax. We’ll update the blog as more details are made public and once actual legislation is introduced.

Update (7/16/2013 at 11:22am EST): Additional details were released and can be found here.

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