Raleigh, N.C. — After unveiling competing Senate tax reform proposals two weeks ago, Republican leaders rolled out a compromise plan Monday that promises to roll back income and business taxes while reining in a massive expansion of sales taxes proposed earlier.
Senate leadership said the latest plan, which alters legislation approved late Monday by the House would cut taxes by more than $1 billion in the first three years.
"(The plan) cuts taxes on people across the board, cuts taxes on job creators across the board," said Senate President Pro Tem Phil Berger. "Our current tax plan takes too much money out of the pockets of the private sector. It takes too much money out of the pockets of individuals."
Following are some highlights of the proposal:
- Reduce the state personal income tax rate from the current maximum of 7.75 percent to 5.4 percent in 2014 and 5.25 percent in 2015
- Phase out the sales tax on food by 2016
- Phase out the corporate income tax by 2017
- Phase out the business franchise tax by 2018
- Eliminate local business privilege taxes in 2018
- Repeal the estate tax
Senate leaders also decided against expanding the state sales tax to services that are not currently taxed, such as automotive repairs, haircuts and professional services, although they do plan to tax movie tickets and other entertainment spending.
A plan authored by Sen. Bob Rucho, R-Mecklenburg, would have lowered the sales tax rate from 6.75 to 6.5 percent but would have spread the tax to up to 130 services. Meanwhile, a proposal backed by Sens. Dan Clodfelter, D-Mecklenburg, and Fletcher Hartsell, R-Cabarrus, would have limited sales tax expansion to services linked to tangible services, such as auto repairs and appliance delivery.
The House proposal would, like the Clodfelter-Hartsell proposal, limit sales taxes to services linked to physical products. It also would lower the overall rate to 6.65 percent.
"From the start of this process, we said that elected officials should not pick winners and losers through our tax code. Taxing mechanics and repairmen in order to give tax cuts to lawyers and lobbyists is not a fair policy,” Berger said in a statement.
Under the new Senate proposal, the sales tax would remain at 6.75 percent.
Officials said the plan also would eliminate the annual tax-free weekend for school supplies and close a number of tax loopholes to generate the revenue needed to offset the income and business tax cuts.
Berger, R-Rockingham, said the Senate tax plan would make North Carolina one of the most business-friendly states in America, compared with its current No. 44 ranking by the Tax Foundation for business tax climate.
“High taxes are a big reason we’ve fallen behind,” he said. “Voters elected us to change the direction of our state. This plan will make North Carolina competitive for 21st-century jobs while providing families with the largest tax cut in state history.”
Democrats say the new proposal would cut revenue for municipalities.
"When you help one entity, you are hurting something else. The question is how do you balance that out," said Sen. Floyd McKissick, D-Durham. "It will have a profound impact on (cities and counties') ability to meet their needs. They will have to raise local property taxes to make up for it."