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Update on North Carolina Tax Reform Efforts

3 min readBy: Richard Morrison

The 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 debate in North Carolina is heating up again as Gov. Pat McCrory weighs in with a statement on the competing bills in the General Assembly:

I believe the bipartisan plan set forth by Senators Fletcher Hartsell and Dan Clodfelter as well as Representative David Lewis’ bill are closest to my position. After more than five months of serious dialogue with community, business and legislative leaders, we are on the cusp of tax reform.


Our ultimate goal is to reduce tax rates for North Carolina families and businesses. The final tax plan must make North Carolina more competitive in order to create jobs and put our people back to work. This in turn will increase state revenue, allowing future tax relief without cutting public services.

At issue are both rate reductions to the individual and 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. and proposals to expand the 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. by designating more services as subject 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. .

The Tax Foundation published a comprehensive look at North Carolina’s tax code earlier this year with the book North Carolina Tax Reform Options: A Guide to Fair, Simple, Pro-Growth Reform by Joseph Henchman and Scott Drenkard. They followed up with a summary of the findings in the form of an op-ed published by the Raleigh News & Observer:

North Carolina policymakers are poised to face that question this legislative session. Tax reform ranks high on the agenda, as the state ranks 44th in the Tax Foundation’s 2013 State Business Tax Climate Index, a comprehensive ranking of tax structures in the 50 states. Compared with other states, we find that North Carolina has high rates on narrow tax bases, meaning some favored activities get preferential treatment while everything else is subject to discouragingly high tax burdens.

Taxes are just one thing that drives individual and business location decisions, but a tax change can have immediate effects. Many states today have crafted their own “tax personality” that distinguishes them as attractive places to live and work. Florida and Texas taxpayers enjoy going without a personal income tax, while Delaware residents embrace tax-free retail sales. North Carolina policymakers and taxpayers will decide which plan is best for the Tar Heel State.

Since then we’ve seen more action in the state. Economist Elizabeth Malm journeyed down south to debate Jared Bernstein, former economics advisor to Vice President Joe Biden, on the best path forward for North Carolina. A video of the event is below.

Tax Foundation analyst and programmer Nick Kasprak also created a way for taxpayers in the state to estimate how their personal finances might be affected by the reform plans, with the North Carolina Tax Fairness Calculator.

Nick also appeared on an episode of the Tax Policy Podcast explaining the work that went into the calculator and how it arrives at its estimates. We're also currently working on a revised analysis of the most current legislative language in the House and Senate, which will be out soon.

See yet more information and analysis on North Carolina here.