Live Blogging the Tax Reform Debate in the North Carolina Senate

June 11, 2013

We've been following the recent tax reform debate in North Carolina. At 4:00 pm EST, the Senate Finance Committee will hear more tax reform legislation. You can listen to a live audio stream here, or follow our live updates here.

Update (4:23pm EST): The Senate Finance Committee is currently hearing discussion of a Senate substitute for HB 998 that passed the House of Representatives yesterday. After distributing legislation, Senator Berger noted:

"What you have before you is a tax reform bill that does not tax food, does not tax prescription drugs, and does not tax services that are not taxed. It does simplify our 1930s era tax code, it provides…relief to working families, it makes North Carolina…more attractive for job creation and it cuts taxes by more than $1 billion in the first three years alone."

It would:

  • Reduce individual income tax to 5.25 by 2015; create new zero bracket for first $15,000 of income (for married filing jointly);
  • Retain the child tax credit ($100, but this is the only one retained);
  • Eliminate corporate income tax by 2017;
  • Phase out franchise tax by 2018;
  • Create flat rate tax on all limited liability companies tax in place of franchise tax (this would eventually be expanded to corporations, too);
  • Eliminate local business privilege taxes in 2018;
  • Remove local food tax by 2016; and
  • Repeal estate tax.

The bill would not expand the sales tax to services, does not change corporate income tax apportionment (since tax will be repealed), and retains scheduled sunsets of various tax expenditures.

Update (4:30pm EST): Meeting documents can be found here.

Update (4:32pm EST): Here's a summary of this bill's content. Actual bill text is here. Fiscal note is here.

Update (4:40pm EST): The state impact is $173.8 million in FY 2013-14 and $510.2 million in FY 2014-2015. This would not cut spending, but would slow the rate of growth of revenue that is projected. The rate of growth would "cover around 3 percent," according to the discussion.

Update (4:43pm EST): I'm interested in the reform of the franchise tax. This tax would now be flat (read: capped, which is good) and apply to more companies (including LLCs now, unlike the current tax structure). It would be renamed the "privilege tax."

Update (4:47pm EST): Like the House debate, electricity taxes have come up. According to Senator Berger, taxpayers currently pay a utility franchise tax plus a sales tax of around 3 percent on electricity. The plan would eliminate utility franchise tax and put full sales tax rate on sale of electricity.

Senate Finance committee will hear this bill tomorrow for a vote.

Update (4:55pm EST): Our economist Scott Drenkard is testifying on some of the economic implications of portions of this bill. Some of his main arguments on the corporate income tax:

  • Taxes and growth are related, and that relationship is negative. Corporate income taxes are the most destructive to growth.
  • The corporate income tax doesn't raise a large portion of revenue–only 4 percent of state and local tax revenues in North Carolina, so repeal is doable.
  • Corporate income taxes aren't fully borne by corporations. A portion of these are passed on to consumers in the form of higher prices and workers in the form of lower wages.

Update (4:57pm EST): On estate taxation:

  • Estate taxes decrease capital stock because they discourage savings. Capital accumulation is a driver of growth.
  • Estate taxes are complex and require significant planning. This planning requires the use of economic resources (time and money) that could be used more effectively elsewhere.

Update (5:00pm EST): We'll have a more detailed analysis of the new legislation soon. Stay tuned for live coverage of continued discussion tomorrow at 1:00pm EST in the Senate Finance Committee.

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