Federal tax changes could mean higher state taxes

Posted April 11, 2018 5:40 p.m. EDT
Updated April 11, 2018 6:44 p.m. EDT

— Many North Carolinians will be paying more taxes to the state because of the federal tax changes signed into law by President Donald Trump before Christmas, officials said Wednesday.

That's good news for the state budget, where lawmakers expect to see an additional $120 million in revenue over the next two years, but not so great for taxpayers.

Congress included a trade-off in the federal tax overhaul – a higher federal standard deduction but fewer and smaller deductions for things like moving expenses and alimony.

North Carolina uses federal adjusted gross income as a starting point to calculate state taxes. Because AGI is figured after the smaller deductions but before the standard deduction, the state stands to gain because some people will have a higher starting point to figure their taxes.

Not everyone will pay more, of course.

Lawmakers are likely to go along with a temporary federal move to expand the deduction for medical expenses for two years, and they're also expected to agree to federal changes that lower the tax burden on more small businesses.

But the cost of those tax breaks will be more than offset by the elimination of all the other federal deductions.

North Carolina got rid of most of its deductions and credits several years ago during the state's own tax overhaul, which also included expanding the state standard deduction and lowering corporate and individual tax rates.

Sen. Tommy Tucker, R-Union, said lawmakers in the process disconnected many state tax laws from federal tax laws, a process known as decoupling.

"When we decouple, we're doing our best to benefit the North Carolina taxpayer," said Tucker, chairman of the Revenue Laws Committee. "We'll have a surplus going in, as opposed to other states that use different ways of taxation and the taxation's much higher. So, tax reform in this case, unbeknownst to us, has paid off."

The federal tax changes won't really show up until tax time next year.