Raleigh, N.C. — The budget that Gov. Pat McCrory signed Friday morning doesn't just change how state government spends money. There will be changes to how North Carolinians pay for state services as well.
In general, the state raises fees on a variety of items, most notably in the Division of Motor Vehicles. It will also charge sales taxes on previously untaxed services such as repairs to cars, installation of big items or warranties connected to new purchases. The state will cut the personal income tax rate for 2017 and expand the amount of income exempt from taxes.
The net effect is a budget that will collect $74.7 million less in the 2015-16 fiscal year that began on July 1, $308.9 million less in the 2016-17 fiscal year and $603.9 million less in 2017-18.
Conservative backers of the budget laud the overall tax cut and say the shift toward sales taxes will help lure businesses and stabilize the state's revenue streams. Liberal critics of the budget say that middle-income and poor residents will end up paying more in sales taxes and fees than they will benefit from the income tax cuts.
Here's a quick summary drawn from a number of legislative documents to let you understand the budget changes for yourself.
Personal Income Taxes
- The 2013 tax reform bill eliminated many personal income tax exemptions in exchange for lowering the overall tax rate. However, that swap hit people with large medical expenses, particularly the elderly, hard on the tax bill that was filed this year. Effective for the current tax year, which will be paid next year, the medical expense deduction returns for everyone.
- Current North Carolina law excludes a base amount of revenue from taxes for all filers. In 2016, this standard deduction, sometimes called a "zero bracket," will move up from $15,000 to $15,500 for a married couple that files jointly.
- North Carolina's current personal income tax rate is 5.75 percent. That will drop to 5.499 percent in 2017. Roughly speaking, that would mean that, for someone who has to pay income tax on $60,000, after excluding the amount allowed under the standard deduction, the tax bill would dip from $3,450 to $3,299.40, a break of about $150.60.
- In total, the changes to personal income taxes will mean North Carolina residents will pay $117.3 million less in personal income taxes for taxes that are filed next year, $437.1 million less the following year and $719.8 million less in 2018-19 than under the current tax law.
- A document produced by legislative staffers shows the impact of income tax change based on a filer's adjusted gross income.
Taxes on Businesses
- North Carolina's corporate income tax rate will drop to 4 percent this year and could drop to 3 percent in future years if the state meets certain income triggers.
- The state would adjust bank holding company provisions but repeal a bank privilege tax. The net result is neither a gain nor loss for state revenue.
- The budget phases in a change to the way corporations are taxes, shifting the state to a "single sales factor" system. This type of change is particularly advantageous to manufacturers, who will pay based on how much they sell rather than how big their payroll is or how much equipment they own and use. Projections show this change will decrease state revenue by $7.9 million in the current tax year when it takes effect Jan. 1, 2016. By 2018-19, corporations will be paying $70 million less per year than under current law.
- The law changes initial franchise tax fees paid by businesses but offsets that by simplifying the franchise tax calculation. The net result is neither a gain nor loss for state revenue.
- The overall North Carolina sales tax rate – between 6.75 percent and 7.5 percent depending on location – won't change. However, North Carolina will now charge sales tax on the repair, maintenance and installation of tangible personal property, services that had previously gone untaxed. That includes things such as car repairs, installation of big appliances or a service contract for a new computer.
- The new sales tax expansion won't apply to people who operate as a contractor or people and businesses that provide services but do not sell anything. For example, a lawnmower repair shop that sells lawnmower parts will likely have to charge sales tax for servicing your equipment, but the person who mows your lawn will not have to charge you tax.
- The changes take effect on March 1, 2016. The first full year the new service taxes are in effect, they are expected to raise $159.5 million per year.
- New money raised from the expanded sales tax system will be used to support mainly rural counties that have been at something of a disadvantage under the current sales tax system. The new revenue allows large urban counties such as Wake County to keep their current revenue while boosting counties where there are not a lot of retail shops. This settles a key sticking point in the budget process between lawmakers from urban areas and those from rural counties.
- The state budget raises fees for a number of services across a number of state government agencies. Many people will encounter these changes where the fees for a standard eight-year driver's license will rise from $32 to $40. The fee for a learner's permit will rise from $15 to $20.
- Other fee changes will apply to food retailer inspections, landfill permits, insurance regulations, the state Boxing Commission and other areas.