North Carolina made headlines in 2013 when it passed its comprehensive 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 package. By lower tax rates and broadening bases, North Carolina jumped from 44th to 12th on the State Business Tax Climate Index. The state implemented additional reforms in 2015, pushing its ranking even higher to 11th on the State Business Tax Climate Index. And the state is continuing this momentum. In the state’s recently adopted budget, the Tar Heel State plans to adopt even more tax reforms in 2019.
The budget, passed over Governor Roy Cooper’s veto, includes several large tax 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. : In 2019, the individual income tax rate would decrease from 5.499 percent to 5.25 percent.
- 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. : The standard deduction would increase in 2019. For single filers, the deduction would increase from $8,750 to $10,000, while married filers would see an increase from $17,500 to $20,000.
- 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. : Also in 2019, the corporate income tax rate would fall from 3 percent to 2.5 percent.
- Franchise Tax: Effective 2019, S corporations would face a lower franchise tax liability. S corporations would pay a flat $200 on their first $1 million in value, instead of 0.15 percent. The 0.15 percent rate would apply to any firm’s taxable value above $1 million. The franchise tax for C corporations is not impacted.
The plan also includes a few changes to the state’s child 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. and 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. treatment of mill machinery.
These changes continue the long-term changes in North Carolina. The top marginal income tax rate in North Carolina was 7.75 percent. By 2019, it’ll have fallen to 5.25 percent. At the same time, the standard deduction has grown from $6,600 for married filers in 2012 to $20,000 in 2019. The corporate income tax rate will have fallen from 6.9 percent to 2.5 percent in 2019.
Unfortunately, these changes, when implemented, won’t increase North Carolina’s official score on the State Business Tax Climate Index. The state’s ranking of 11th is very difficult to improve upon, but the state should be applauded for continuing its positive, pro-growth tax changes.
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