Raleigh, N.C. — One of the sticking points in tax reform negotiations between the House and Senate has to do with the franchise tax charged to the state's biggest businesses.
Separate and apart from the corporate income tax, the franchise tax acts as a statewide property tax on land, buildings and other capital assets owned by companies organized as C corporations and S corporations – the legal structure used by the state's biggest businesses – but not on those organized as limited liability corporations or partnerships – which can range in size and profits from tiny dollar amounts to millions of dollars in revenue.
In their original bill, House lawmakers proposed trimming the franchise tax from $1.50 to $1.35 on each $1,000 of property owned. Senators want to do away with the franchise tax altogether and impose a new, flat-rate business privilege tax on all businesses, LLCs and C corporations alike.
As part of their ongoing negotiations over a tax reform bill, the House made a counteroffer to the Senate late last week. Documents provided by a source knowledgeable about the negotiations, show the House's latest offer would keep privilege taxes as they are, taxing $1.50 per $1,000 of property.
That's unlikely to make the state's biggest businesses happy. The North Carolina Chamber endorsed the Senate version of tax reform earlier this month, in large measure due to the fact that it eliminated the franchise tax by 2018.
But the House is concerned that the Senate plan would force budget-writers to cut the budget more deeply than is prudent. Keeping the franchise tax at its current level allows the House to agree to some Senate positions while avoiding the deepest budget cuts.
However, talking about budget and tax "cuts" is a semantically fraught proposition. The various tax proposals put forward by the House and Senate would both raise less revenue than the current system would, and many taxpayers would pay less per year under each plan.
But in the aggregate, each of the most recent revenue proposals would bring in more money to state coffers, they would just do it at a slower rate than the current tax system does. So, while the current tax code would bring in roughly $24.27 billion by fiscal year 2017-18, the House plan would raise $23.5 billion that same year, or $769.2 million less than the current plan. The Senate proposal restricts revenue growth even more, with state income growing to only $22.94 billion, or $1.33 billion less than the current system.
All three systems allow for government to grow somewhat. The policy question, of course, is whether that growth is fast enough to keep up with demands for needed government services.
Other key things to know about the House's latest counteroffer to the Senate include:
- So far, the House is sticking by its position of trimming the state's three-tiered income tax system to a flat rate of 5.9 percent. The Senate would drop personal income tax to 5.25 percent in fiscal year 2015-16.
- The House would eliminate a $50,000 personal business deduction taken by businesses not organized as C or S corporations this current tax year. That would mean many taxpayers would need to adjust how much they're making in quarterly payments. The Senate plan eliminates that deduction but not until the next tax year.
- The Senate proposal would eliminate the corporate income tax entirely. The House moved toward the Senate's position in its latest offer, proposing that the corporate income tax rate drop to 5 percent by 2016.
- The new House proposal would eliminate the sales tax holiday for both Energy Star appliances as well as back-to-school shopping, just as the Senate would have.
- The House has agreed to a Senate proposal that eliminates a tax break for tobacco wholesalers who file their paperwork on time.
Senate leaders are expected to make their own counteroffer later this week.