Senate bill lowers taxes, redefines job luring programs

"Make no mistake, a proposal such as this takes a great deal of compromise," Senate President Pro Tem Phil Berger said, taking the unusual step of introducing the bill to the committee personally.

The measure is likely to move in the coming week as senators also push forward with their version of the state budget.

Gov. Pat McCrory has been pushing for an economic development package since December, repeatedly saying he has been hamstrung in job recruitment efforts by a lack of funding and policy direction. Both South Carolina and Georgia have recently landed automakers as Tar Heel State job recruiters said they just didn't have the resources to compete.

This bill pumps up McCrory's job incentives authority and makes several tax changes designed to lure manufacturers.

The bill would lower North Carolina's personal income tax rate from 5.75 percent to 5.5 percent in 2016.

It would also expand a taxpayer's "standard deduction," what some lawmakers call the "zero bracket." This is the portion of an individual's income on which they pay no tax.

Under current law, for example, a married couple who file their income taxes jointly has a standard deduction of $15,000, earnings on which they pay no income tax. That zero bracket would move to $17,500 in 2016, $17,750 in 2017, $18,000 in 2018, $18,250 in 2019 and $18,500 in 2020.

"Our goal is to allow working families and small businesses to enjoy the money that they earn," Sen. Bob Rucho, R-Mecklenburg, told the committee.

As explained by Rucho and a summary issued with the bill, taxpayers would be able to itemize up to $20,000 for any purpose they claimed for federal tax purposes. That would add back expenses for medical and dental expenses, investment interest expenses, job expenses and theft losses currently excluded by the state tax code.

Corporate taxes were already set to drop from 5 percent this year to 4 percent in 2016 and 3 percent in 2017 if the state meets certain revenue projections. North Carolina is on track to meet those projections, and the Senate tax bill sets those rates in law rather than relying on triggers.

The bill also makes other changes affecting businesses, including:

The bill would both expand the number of items that are subject to sales tax as well as how that tax money is distributed.

The bill also curbs the sales tax refunds that can be obtained by large nonprofits. From 2015 to 2020, the amount of tax-exempt purchases would drop from $666 million to $14.8 million. That means the amount of a sales tax refund that a nonprofit could obtain would drop from $45 million today to $1 million in 2020.

"We're talking about very big businesses," said Sen. Andy Wells, R-Catawba.

By and large, it would mostly be hospitals that would see their sales tax refunds drop, Wells said.

The measure also changes how sales taxes are distributed in the state. Under current law, 75 percent of the sales tax goes to the county and city where the purchase is made, while 25 percent is distributed across the state based on population. Over the next four years, that formula would change so that, effective July 1, 2019, 20 percent would go to the county where a purchase is made, while 80 percent of sales taxes collected across North Carolina would be distributed based on population.

This measure has been pushed by Sen. Harry Brown, R-Onslow, as a way to help smaller counties with smaller property tax bases. The current law, he points out, favors large counties such as Wake County that have large shopping areas.

However, Brown insisted this was less a rural-urban issue than some have made it out to be.

A book that accompanied the tax bill shows there are roughly 10 counties across the state that would lose money under the plan, including Wake County. However, 97 counties, including Wake, would be able to raise their sales taxes by way of a referendum, which would more than offset any losses under the bill.

For example, Wake County would collect $5 million less under the bill for the year beginning July 1, 2019. However, the county would have the option of raising a half-cent in sales taxes that could raise an additional $78 million.

"Those particular revenues would stay within those particular counties," Brown said of the extra half-cent provision.

The bill would recharge and expand the state's Job Development Incentive Grant program, North Carolina's leading job recruitment tool. It retains the current $15 million per year cap but creates an exception for a high-yield project.

A high-yield project is one that would invest $750 million in private funds and hire 2,000 eligible workers. Such a project would be able to receive 100 percent of its withholding taxes as a grant over the next 20 years, a longer and more generous boon than is available to any company under current law. It also doubles the amount of JDIG money available in a single calendar year from $15 million to $30 million in the case of a high-yield project.

The JDIG provisions in the bill also include incentives to drive investment to rural areas. For example, a project locating in a "Tier 1" area, one of the state's most economically distressed, would have to pay 100 percent of the county's prevailing wage. However, in what are now called a "Major Market Community," big counties that include Wake, Durham and Mecklenburg, a company would have to pay 120 percent of the prevailing average wage.

Projects in urban counties would also have to hire more workers in order to qualify for the grant.

A similar tweak is made to the One North Carolina Fund, which matches investments made by local governments. More state dollars will go to economically distressed areas while the state would put only $1 for every $2 invested locally in a major market such as Wake County.