@NCCapitol

@NCCapitol

Latest Senate tax bill seeks compromise with House

Posted July 1, 2013

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— The state Senate rolled out its latest tax reform plan Monday afternoon, taking some steps toward compromise with the House.

However, the two sides still differ on big issues, such as the corporate income tax, personal income tax rates and how nonprofits are treated. 

“We believe this plan is a fair compromise that addresses the lion’s share of concerns expressed by House leadership,” Senate President Pro Tem Phil Berger said in a news release. “We hope it is the foundation for a final agreement that delivers meaningful and much-needed tax reform and relief for North Carolina.”

Democrats have taken issue with all versions of tax reform offered by Republicans thus far and they are critical of the progress made on this latest compromise effort.

“It would appear that the Republican negotiations have consisted of sitting around trying to figure out a way to fool working families," said Sen. Martin Nesbitt, D-Bucombe, the Senate minority leader.

The House passed House Bill 998 on June 7. The next week, the Senate rolled out its own version of tax reform and gave the plan tentative approval. However, senators pulled the measure back from consideration to give the two sides time to negotiate. 

Those negotiations have been slow, and House lawmakers have taken this week off from formal legislative business. If all goes as plan, the latest Senate tax offer will be waiting for House lawmakers to consider when they return from break. Most likely, the House will send the plan to a conference committee to work out differences between the two chambers.

Click here for a comparison of the most recent tax reform bills prepared by the legislature's fiscal staff. Below is a comparison of the House-passed version of House Bill 998, the Senate version as it tentatively passed the chamber on June 13 and the new Senate version as of July 1. 

Tax CategoryHouse version of HB 998Senate version of HB 998 on June 13.Senate counter-offer of HB 998 on July 1.
Personal Income TaxMoves the state's 3-tiered income tax structure with a top rate of 7.75 percent to a single flat-rate of 5.9 percent. Created a single flat rate of 5.4 percent in 2014 and 5.25 percent in 2015. Would have created a "zero tax" bracket. Single filers would have paid no tax on their first $7,500 of income, those married and filing jointly would have paid nothing on the first $15,000 of income. Creates a flat rate of 5.75 percent starting in 2014. There is no "zero tax" bracket. 
Itemized deductionsUnlimited charitable contributions. Mortgage interest and local property tax deductions could not exceed $25,000 combined.Individual deductions eliminated. Unlimited charitable contributions. Mortgage interest and local property tax deductions could not exceed $15,000 combined.
Social SecurityNo change from current law.Tied NC's treatment of Social Security income to federal treatment. Advocates for seniors worried this treatment could mean higher taxes for retirees. No change from current law. However, a current $4,000 deduction for retirement income would be eliminated. 
Child Tax CreditWould have raised North Carolina's child tax credit to $250 for families making less than $100,000. No change to current law. 

No change. Leaves credit at $100 for a couple married filing jointly with an income of less than $100,000.

Corporate income taxesStepped North Carolina's corporate income tax down from its current rate of 6.9 percent to 5.4 percent in 2018. Lowered North Carolina's corporate income tax to 6 percent in 2014 and then in 2 percentage point increments after that. Eliminated by 2017.

Slows the rate of the phase out. Corporate income tax steps down to 6.4 percent in 2014. It would be eliminated by 2018.

 

Franchise TaxLowers corporate franchise tax, a de facto property tax, from $1.50 per $1,000 of property owned to $1.35 per $1,000 of property owned. The minimum tax would be $35. Lowers the franchise tax to $1.20 per $1,000 of property owned in 2013 and then steps it down over the next five years until it is eliminated in 2018. The Senate plan would replace the franchise and corporate income taxes with a business privilege tax. 

The franchise tax would step down with the rate going to $1.25 in 2015, $1.00 in 2016, $0.75 in 2017. The minimum tax a company would pay would remain at $1,000 in 2017. 

The new Senate plan also relies on a business privilege tax to replace income from the franchise tax. If left as is, the current Senate plan could wind up imposing both a franchise tax and privilege tax in 2018, but the bill envisions eliminating the franchise tax in later years.

Business privilege taxNo business privilege tax.Creates a flat business privilege tax that would be $5,000 for C-corporations and $750 for all other businesses in 2018. Creates a flat business privilege tax that would step up starting in 2015. By 2018, the tax would be $500 for all businesses. 
Sales taxesNeither the House nor Senate plan changed the local sales tax rates. The House plan effectively raised the sales tax on movies and live entertainment by eliminating a special rate and including entertainment in the general sales tax rate. The House would apply sales tax to certain services associated with tangible goods, such as delivery, service plans and repairs. The Senate plan did not change the rates, but would have eliminated the 2 percent local tax on groceries. Counties would have had the option of reimposing the tax. The Senate plan effectively raises the sales tax on movies and live entertainment by eliminating a special rate and including entertainment in the general sales tax rate. The Senate plan did not expand sales taxes to services.

The new Senate plan leaves the local tax on groceries in place. It effectively raises the sales tax on movies and live entertainment by eliminating a special rate and including entertainment in the general sales tax rate. The new Senate plan would tax service contracts, but not alteration, repairs, cleaning or installation. 

 

Tax holidaysKeeps current back-to-school and Energy Star sales tax holidays. Eliminates both sales tax holidays starting in 2014. Eliminates both the back-to-school and Energy Star sales tax holidays. This is a point of agreement in the House-Senate negotiations that have taken place since the House first passed HB 998. 
NonprofitsMakes no changes to the sales tax refunds nonprofits can claim.Capped sales tax refunds for nonprofits, starting at $7.5 million in state sales tax for 2014. By 2017, nonprofits would have only been able to recoup $100,000 in state sales tax and $30,000 in local sales tax. UNC Hospital System would be given an exemption as a state agency. Other nonprofits, including other hospitals, would see their refunds capped at $10.5 million for state and local sales taxes combined in 2014. That cap would step down until in 2017, it would be $2.85 million combined refund for state and local sales taxes. 
Local government refundsLocal governments maintain current exemptionsEliminates local government sales tax refunds starting July 1, 2014.Eliminates local government sales tax refunds starting July 1, 2014.
$50,000 personal business income tax deductionEliminated in 2013.Eliminated in 2014. Eliminated in 2014. 
ElectricityElectricity is currently taxed at 3 percent. The House plan would move electricity to the general sales tax rate, which is 6.75 percent in most of the state. Electricity is currently taxed at 3 percent. The Senate plan would move electricity to the general sales tax rate, which is 6.75 percent in most of the state.This is a point of agreement between the House and Senate. The latest Senate plan would eliminate the 3 percent tax on electricity in favor of applying the general sales tax rate, which is 6.75 percent through most of the state. 
Sales tax exemptionsEliminates sales tax exemption for nutritional supplements sold by chiropractors. Eliminates sales tax exemption for nutritional supplements sold by chiropractors. Eliminates sales tax exemptions for newspapers and vending machines on Oct. 1, 2013. Eliminates sales tax exemption for nutritional supplements sold by chiropractors. Eliminates sales tax exemptions for newspapers and vending machines on Oct. 1, 2013.
Gas TaxNo change from current law. No change from current law.Caps tax for one year at current rate from Sept. 1, 2013 to July 1, 2014. 
Estate tax Eliminated EliminatedEliminated
CigarettesNo changeEliminates a discount for tobacco wholesalers starting in July 2014. Eliminates a discount for tobacco wholesalers starting in July 2014.
StudiesN/AN/A

The state Senate bill would call for several studies of items that have been controversial in House and Senate negotiations. Among the studies: 

  • a preferential rate for diesel fuel sold to railroads, fuel sold to passenger air carriers and fuel sold to motor sports. 
  • local privilege taxes
  • expanding sales taxes to other services.
  • eliminating the franchise tax. 
  • impact of capping sales and use tax refunds for nonprofits. 
Bottom line: 

Raises $20.51 billion in 2013-2014. Revenue steps up to $23.69 billion by 2017.

Over five years, the House plan would give the state $1.77 billion less to spend. 

Raises $20.29 billion in 2013-14. This drew objections from the House as requiring too spartan of a budget. The Senate plan would raise $4.6 billion less over the next five years than the current revenue scheme. Raises $20.3 billion in 2013. Although the current year budget is still much lower than the House plan, the new Senate plan would require fewer cuts in later years. For example, by 2017, the measure would raise $23.3 billion. That is still a $400 million annual difference between the House and Senate. Over five years, the new Senate plan would raise $3.28 billion less than the current tax system. 

 

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