North Carolina Continues its Successful Tax Reforms

North Carolina made headlines in 2013 when it passed its comprehensive tax 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 Tax: In 2019, the individual income tax rate would decrease from 5.499 percent to 5.25 percent.
• Standard Deduction: 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 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 credit and the sales tax 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.