Raleigh, N.C. — The budget senators tentatively approved Thursday contains a tax break that will benefit low- and moderate-income families the most, as well as changes to how sales taxes apply to certain services.
Senate President Pro Tem Phil Berger said North Carolina residents expect lawmakers to spend tax dollars wisely, adding, "They also expect us to think of them when there's extra money."
The most notable tax change in the budget expands the standard deduction – what some people call the zero bracket – for income tax filers who do not itemize their expenses.
That expansion works differently depending on whether you file as an individual, a couple or a head of household. But for a couple married and filing jointly who paid no tax on their first $15,500 of income for 2015, they would pay no income tax on the first $16,500 of their income in the 2016 tax year. Under the Senate budget, in 2017, that same married couple would have the first $17,500 of their taxes exempted from their income, a $2,000 expansion of the zero bracket over two years.
The state House also proposed expanding the zero bracket but would do so more slowly than the Senate.
"It actually gives the middle-class people more money right now when they need it rather than four years from now," Sen. Bob Rucho, R-Mecklenburg, said of his chamber's budget.
Those differences of taxes will be among the items the House and the Senate need to reconcile when they begin drafting a final compromise budget next week.
Senators also included a sales tax clarification in their budget, building on a move last year to charge sales taxes on services. Those service taxes, lawmakers argued last year, will help make sure the sales tax remains a steady source of income and will not discourage investment in the state as much as higher income taxes would.
This year's changes are a "clarification" of last year's bill, Rucho said.
"There's no expansion of the sales tax," he said.
Rather, Rucho said, the Senate bill merely clarifies that businesses that provide the same service should have to collect the same sales taxes. The changes appear to focus on property maintenance services.
Liberal-leaning critics of Senate Republicans point out the changes will result in the state collecting more revenue.
"The way to read it is they are specifying services to be subject to the sales tax that they had not noted previously," said Alexandra Forter Sirota, director of the Budget and Tax Center, a division of the North Carolina Justice Center. "In my mind, that's an effort to increase the number of services subject to sales tax. ... It is an expansion."
However, the sales tax provision contained in the Senate budget would cost only $35 million, far less than an earlier estimate of $140 million rendered by the General Assembly's fiscal staff when a separate clarification bill was considered earlier this week.
Rucho said the difference between the two bills centers mainly on how the two measures treat renovations of kitchens and bathrooms, particularly cabinet installation.
A third major tax change is meant to lure high-tech companies and those that provide services in multiple states. The switch to "market-based services" will save money for companies that choose to base themselves in North Carolina but sell services in multiple states. It would tax those companies based on the products or services provided in North Carolina, rather than their real estate, equipment and employee footprint in the state.
One industry would not benefit from that switch.
Television networks and other entertainment companies based outside the state that sell advertising on their products would pay more. That's because the Senate bill overrides a 2012 interpretation by the Department of Revenue on how to tax those advertising dollars. The new market-based sourcing plan would tax those companies based on the licensing fees and other revenue they earn from their content in North Carolina.
Affected companies would include broadcasters such as CBS, NBCUniversal and Walt Disney, the owner of ABC, as well as other big content providers.
The Motion Picture Association of America estimates the added costs to their industry will be between $3 million and $36 million. But Vans Stevenson, a vice present for the MPAA, said that cost will boomerang on the state.
"Ultimately, that gets passed on to the middle-class North Carolina consumer in either their cable television subscription or the bill for their satellite services," Stevenson said.