Raleigh, N.C. — House leaders on Thursday posted the legislative language for their own tax reform proposal, answering an outline put out by the Senate earlier this month.
Senate leaders still haven't posted a draft bill, rolling out "a concept" in the form of a website.
Republicans control both the House and Senate, and although their tax reform proposals share some common themes, there are big differences.
Broadly, the Senate plan is the "go big" approach endorsed by national groups like Americans for Prosperity and Grover Norquist's Americans for Tax Reform. It reduces income taxes steeply, relying much more on sales taxes to fund state government.
The House plan moves in the same direction but takes a much smaller first step. Both House and Senate leaders say they would eventually like to phase out income taxes in favor of an all consumption/sales tax model.
"We think it makes our tax code simpler," said Rep. David Lewis, R-Harnett, the author of the House bill. "We think it makes it more fair in that people are able to keep more of the money that they earn. We think it's easier to administer than some of the other proposals that have been discussed."
Bot the House and Senate plan lower the sales tax in most places. The current combined state and local sales tax rate in most of North Carolina is 6.75 percent.
The Senate plan drops that rate to 6.5 percent; the House plan would drop it to 6.65 percent. However, the big difference is in how those rates are applied.
The Senate moves much more in the direction of a consumption tax model, taxing some 160 services as well as goods while eliminating loopholes. Lawn mower repairs, hair cuts and legal services would all be taxed alike under the Senate bill.
The House bill is much more conservative in its sales tax expansion. It expands sales taxes only to services attached to tangible goods. So, the House plan would tax the delivery of a big appliance such as a refrigerator and repairs to lawn mowers. But it would not tax lawn-mowing services or hair cuts, as the Senate plan would.
"Our logic behind that is those businesses are already equipped, set up and accustomed to collect and remit sales taxes," Lewis explained.
The upside of the House plan is it avoids hiring hundreds of new Department of Revenue workers to instruct businesses on their responsibilities and to audit their books.
However, the Senate plan ensures that white-collar jobs like the legal profession are treated equally to blue-collar jobs.
The House plan also keeps the current 2 percent tax rate for groceries and the current exemption for prescription drugs. The Senate plan would tax those two items at the same rate as all other goods.
Personal Income Tax
Currently, the state's top income tax rate is 7.75 percent.
The House plan moves state income taxes to a flat 5.9 percent, giving couples filing jointly an exemption of up to $12,000.
The Senate plan is more complicated. The state's top rate would drop to 4.5 percent. People at the very lowest end of the income scale, those making roughly $12,000 per year, would pay no income tax under the Senate plan.
Both the House and Senate plans would end the estate tax – some conservatives call it the "death tax" – imposed when someone dies.
Both plans also move toward a more favorable treatment of businesses, taxing them for the amount of sales they have in the state rather than a complex formula that includes their sales, workforce and capital holdings.
Under the Senate plan, the corporate tax rate would drop from 6.9 percent to 6 percent. The House plan would drop that rate to 6.75 percent.
Gov. Pat McCrory offered praise for the House plan, embracing it more warmly than he did the Senate-drafted package.
“I am encouraged by the bill details I have seen in the House plan on reforming North Carolina’s tax code,” McCrory said in a statement. “The House plan, combined with other proposals, provides several options that will allow us to develop competitive tax reform which is fair to North Carolina families, attracts job creators and provides certainty that will encourage home-grown businesses to expand. My goal is to work with leaders in both the House and Senate to implement reform that is financially sound, fair and rewards productivity, savings and investment.”
Liberals immediately pilloried the House plan.
"The House tax plan will put at risk funding for educating our kids, maintaining our natural resources and keeping our communities safe, all in order to provide the wealthiest North Carolinians with tax cuts," the North Carolina Budget and Tax Center said in a statement. "The centerpiece of the plan is an unaffordable income tax cut that will primarily benefit the rich and profitable corporations. The $1.2 billion price tag over five years is more than what we spend on our community colleges annually."