After an whirlwind couple of weeks in which the mortgage interest deduction nearly derailed North Carolina 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 efforts, House Bill 998 passed the House of Representatives early Friday afternoon. For more information on the legislation, you can view the plan’s summary and fiscal note, or check out the analysis we released this morning.
Though the floor debate was short, it was heated. Multiple amendments were offered (but all ultimately tabled). Those offered included various combinations of the following:
- Keeping 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. structure graduated to some degree by retaining an additional higher bracket on higher-income earners,
- Extending or expanding the state’s Earned Income Tax CreditA tax credit is a provision that reduces a taxpayer’s final tax bill, dollar-for-dollar. A tax credit differs from deductions and exemptions, which reduce taxable income, rather than the taxpayer’s tax bill directly. (which is set to expire soon), and
- Lowering taxes on electricity.
Critics of the bill argued that it disproportionally helps millionaires. This point of contention was passionately debated, but ultimately one thing needs to be kept in mind. When you compare an income tax cut of a given percentage on someone who pays a lot in incomes taxes to someone who pays less in income taxes, simple math tells you that the former will be higher. That’s not an argument against cutting income taxes on everyone.
Opponents also asserted that the proposal would increase sales taxes on low-income earners due to its 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 certain services. Like I’ve noted before, sales tax regressivity can be easily fixed and this shouldn’t be a reason to write off an otherwise positive tax reform proposal. Further, 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. expansion is very moderate.
The bill will now be heard for its third reading on Monday. Don’t forget that the Senate has been discussing tax reform plans of their own, which are on the table for discussion in Senate Finance early next week.
You can check out our analysis on the House and Senate plans here, or find more on North Carolina in general here. We’ll continue to follow the discussion as it proceeds.
Follow Liz on Twitter @elizabeth_malm.
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