Raleigh, N.C. — State Senate lawmakers are scheduled to vote Tuesday on what they’ve titled the "Billion Dollar Middle Class Tax Cut," a proposal that’s likely to be part of their overall budget plan but is being handled separately as what’s known as a standalone bill.
Senate Bill 325 would be the largest tax cut since Republican lawmakers passed their tax overhaul in 2013. Senate leaders say it’s targeted more toward lower- and middle-income families than the earlier plan, which gave the largest tax cuts to wealthy taxpayers and corporations.
Under the measure, beginning in tax year 2018, the state’s flat income tax rate, currently at 5.499 percent, would drop to 5.35 percent. The standard deduction – the amount of income on which no tax is owed – would rise from $17,500 to $20,000 for married joint filers and from $8,750 to $10,000 for single filers.
Deductions to change
The bill would also change the way two deductions are calculated: mortgage interest and property tax, and the child tax deduction.
Mortgage interest/property tax: Under current law, all taxpayers can deduct up to $20,000 for those expenses. Under the Senate proposal, that would increase to $22,000 for married taxpayers filing jointly. However, other categories of taxpayers would be able to deduct less: for single or married filing separately, the cap would be just $11,000, while heads of household would be able to deduct $16,500.
Child tax credit/deduction: Under current law, each child in a family making less than $40,000 per year is eligible for a tax credit of $125. Families making up to $100,000 can claim $100 per child. It’s a non-refundable credit, so it can used to offset tax owed, but those who don’t owe any tax don’t get that money as a refund.
Under Senate Bill 325, the credit becomes a deduction, which lessens the amount of income on which taxes are owed. Families making $40,000 a year or less would receive a $2,500 deduction per child, which would equate to a tax break of $133.75 under the new 5.35 percent tax rate. Families making up to $60,000 could claim a $2,000 deduction per child, which would mean a $107 cut.
Families making up to $80,000 could deduct $1,500 per child, which equates to $80.25 less taxes owed. They would actually see their child tax break decrease, as would families making up to $100,000 a year, which could claim only a $1,000 deduction, worth $53.50.
However, families making between $100,000 and $120,000 a year, who are not currently eligible for the child tax credit, would become eligible for a small deduction of $500 per child, with a tax value of $26.75.
Changes to affect businesses too
Business taxes would also see changes under the plan. The corporate tax rate, which has already dropped to 3 percent currently, would fall to 2.5 percent by 2019.
S-corp holders with businesses worth more than $133,000 would also receive a tax cut due to changes in the way franchise taxes are calculated. However, those with businesses worth less than that would end up paying more as the result of the change.
Some other businesses would end up paying more taxes, too, through a change known as "market-based sourcing." Under the change, multi-state corporations with employees and capital investments in the state would pay less state tax, while multi-state corporations that are headquartered in other states but that do a lot of business in North Carolina would pay more state tax.
Billion in revenue cut over two years
According to fiscal analysts at the state legislature, the package of changes would result in $324 million less revenue in the upcoming fiscal year, about $710 million less in fiscal 2018-19, and $775 million less in fiscal 2019-20.
Senate Republicans who support the measure point out that the state has had budget surpluses for the past two years, and that some of that money should go back to taxpayers. Critics of the measure say essential long-term needs in transportation and education have gone unmet for years since the recession first hit state coffers in 2009. They argue the money should be used to make up for those delayed expenditures.
Although the measure is all but certain to pass the Senate, its fate beyond that point is less sure. House Republicans have submitted their own plan for a substantially more modest tax cut, while Gov. Roy Cooper has expressed support for middle-class tax cuts but not for additional corporate cuts.