North Carolina Senators Roll Out Updated Compromise Plan

July 1, 2013

In a late afternoon Senate Finance committee meeting today, North Carolina Senators outlined an updated version of their tax plan, following a two-week standstill as legislators tried to rectify differences between the two chambers’ visions of the ideal tax package. Senator Berger, leading the discussion, argued that the new version addressed the concerns voiced by members of the House after the Senate proposed a substitute to the original House plan. Many provisions remain the same, such as a flat individual income tax, corporate income and estate tax repeal, and reform to the state franchise tax.

A handy chart was provided outlining major differences between the original House plan (HB 998), the previous Senate proposal, and today’s updated Senate bill. Actual bill text can be found here. Major differences from the Senate’s previous version include:

  • Slightly higher individual income taxes (the rate would now sit at 5.75 percent rather than 5.25 percent);
  • Retention of full income tax exemption for Social Security income;
  • Allowance of certain itemized deductions (unlimited charitable contribution deduction and $15k cap on total of real estate property tax deduction plus mortgage interest deduction);
  • Lower business privilege taxes (still a flat fee);
  • Local government authority to levy privilege taxes (addressing the concern that localities would have to raise property taxes to make up lost revenue);
  • Expansion of the sales tax base to include certain service transactions;
  • Retention of local sales tax on food;
  • Retention of sales tax exemption for packaging;
  • Increased cap on sales tax refunds to nonprofits; and
  • Cap on gas taxes for two years.

Unfortunately, the new legislation does not included a broad expansion of the sales tax base to services. Sales taxes would only be levied on those service transactions provided by firms that already sell tangible personal property and thus already collect sales tax on those goods. Ideally, comprehensive sales tax reform would expand the base to include all good and service transactions, except for business inputs (like what was done in Senator Rucho’s original tax plan).

The updated Senate plan would also remove multiple sales tax exemptions that are accurately classified as business inputs. These should not be taxed because this leads to sales tax pyramiding. (For a full list of repealed exemptions, see the row titled “various exemptions/refunds” on page 6 of this document). In the previous version, however, even more business inputs were included in the sales tax base (namely, the exemption for packaging)—the updated proposal is an improvement in this respect, but it’s far from perfect.

One big point of disagreement was the fate of the sales tax refund for nonprofits, which mostly benefits nonprofit hospitals. Opponents of capping the refund at a low amount (the cap in the old plan was $130,000 once fully phased in) claim that it will put hospitals in the red, forcing smaller hospitals to cut jobs. I would argue this isn’t the case; nonprofit hospitals are just profit-earning entities that happen to be able to classify themselves as “nonprofit” and earn multiple tax benefits. The new Senate legislation caps refunds at $2.85 million. Senator Berger pointed out that an entity would have to spend approximately $40 million dollars on taxable items to exceed new this generous cap.

Another major point of contention was the taxation of Social Security income. The previous Senate proposal would have taxed Social Security benefits to the extent that they are taxed at the federal level (North Carolina is one of 27 states that exempt all Social Security income from state income taxes). The updated Senate plan retains the existing full exemption.

In terms of revenue, the new bill cuts taxes by an amount that’s in between the original House plan and the former Senate version. Once fully phased in in the 2017-18 fiscal year, the House plan would cut taxes by $570.9 million, while the old Senate version would cut $1.38 billion. This new version makes cuts taxes by $963 million.

The legislation was approved by the committee by a voice vote. It will likely head to the Senate floor for third reading within the next few days, as the Senate adjourns for the Fourth of July holiday on Wednesday night. With any luck, the version that clears the Senate will resemble the House tax cut vision so that the two chambers will be able to reach a compromise just in time for the July 31st budget deadline.

More on North Carolina here.

Follow Liz on Twitter: @elizabeth_malm.

Update: A previous version of this post said the gas tax would be capped for one year, rather than two (the result of an amendment). The bill passed third reading on July 3, 2013.

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