More Details Released on North Carolina Compromise Plan

July 16, 2013

Last night, further details on the agreement reached between Tar Heel legislators and Governor McCrory were released to the public. In addition to the provisions we reported on yesterday, the compromise plan will also make changes to the sales tax. In particular, it will:

  • Add service contracts to the sales tax base;
  • Make manufactured and modular homes subject to state rate of 4.75 percent (rather than the 2 percent and 2.5 percent rates, respectively, to which these transactions are subject);
  • Eliminate certain exemptions (nutritional supplements sold by chiropractors, certain newspaper sales, attractions exemption; meals sold in higher educational facilities; and certain bakery items);
  • Eliminate multiple gross receipts franchise taxes, privilege taxes, and preferential sales tax rates and make those transactions subject to sales tax (electricity gross receipts tax; amusements and movies privilege taxes; preferential sales tax rates on manufactured and modular homes and electricity; gross receipts franchise tax on electricity; amusements gross receipts franchise tax; and piped natural gas excise tax);
  • Eliminate sales tax holidays;
  • Require an annual gross income requirement of $10,000 for farms to receive exemptions;
  • Caps refunds for state and local sales tax paid by nonprofits at $45 million;

There are definite simplification benefits here. Charging multiple tax rates on different industries and transactions is non-neutral and it adds unnecessary complexity to the tax code. The expansion of the sales tax base to certain services is far less comprehensive than we originally hoped, and it certainly isn’t as robust as Senator Rucho’s sales tax expansion to over 100 services. It also seems that multiple business inputs, which would have been added to the base under an early version of the Senate plan, have been excluded from the base. This is important because applying the sales tax to business inputs is distortive and leads to tax pyramiding.

We also have additional details on certain individual income tax benefit programs. Namely, the existing retirement income benefit would be eliminated, as would the severance wage deduction. Multiple corporate and individual income tax credits that are currently scheduled to sunset would still be eliminated as planned (for full details on these, see page 3 of this comparison chart).

Actual legislation was posted on the NC General Assembly website this morning and can be found here.

WRAL News posted some handy reference materials this morning:

Once fully phased in in the 2017-18 fiscal year, the agreement would amount to a $727.8 million state tax cut. Local governments would see an increase in funding of $42.9 million in that same year.

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