House, Senate, governor reach tax deal
Gov. Pat McCrory and the legislature have reached a deal that will cut corporate and personal income taxes. It also provides the foundation for a budget deal expected to be formulated later this week.Posted — Updated
Republicans in the House and Senate signed off on the deal during closed-door caucus meetings Monday afternoon.
"We've done something that no legislature has done since the Great Depression," House Speaker Thom Tillis said during a news conference. "Everybody's tried to take a bite of this apple, but they fell short because they lacked the courage and they lacked the commitment to getting in a room and working out their differences."
The package will reduce both personal and corporate income taxes. It also eliminates the estate tax and preserves the ability of most nonprofits to get refunds of what they pay in sales taxes.
Rewriting the state's tax code has been a major goal for both McCrory and Republican legislative leaders. However, even some GOP lawmakers kindly disposed toward rewriting the tax code withheld some praise from the plan.
"Is this comprehensive tax reform? No. But this is the first step towards it," said Sen. Bob Rucho, R-Mecklenburg.
Rucho wrote earlier versions of tax reform proposals that would have forced the state's income tax rate down to zero by broadening the number of items and services to which sales taxes apply. It also ended special tax breaks for a number of industries.
His version of tax reform was set aside, however, due to objections from House members and the governor's office.
In particular, McCrory has said that any tax reform plan needs to give the state enough money to operate. He called the package rolled out Monday "fiscally responsible, ensuring the appropriate revenue for state government services now and in the future."
The measure replaces the three-tier personal income tax system with a flat tax of 5.8 percent in 2014, which drops to 5.75 percent in subsequent years. Standard deductions increase to $7,500 for single filers, $12,000 for heads of households and $15,000 for married couples.
Republicans say that lowering taxes will cause the economy to grow, helping more people to get employed and bringing more money into state coffers.That economic growth, they insist, will mean that the reduction in tax revenue will not be a steep as a "static" model predicts.
"Our goal is to get people back to work," McCrory said.
But critics of the plan say there's little evidence to backup that idea.
"It is very likely that as a result of this failure to pursue real, comprehensive tax reform, state sales taxes and local property taxes will go up in the future," Alexandra Forter Sirota, director of the liberal N.C. Budget & Tax Center, said in a statement. "That’s what happened in every other Southern state that has personal and corporate income taxes that can’t keep up with growing public needs."
Sen. Mike Woodard, D-Durham, also criticized the proposal for its cuts to state spending in coming years.
"What happens is, if this is not revenue neutral, our citizens lose," Woodard said. "The services we provide – education, health care – these are going to suffer under this tax proposal."
Passage expected this week
Among its other features:
- Deductions for mortgage interest on first homes, something that had been a point of contention between the House and the Senate, will be capped at $20,000. Despite being high relative to most single-family homes, that deduction cap still makes the North Carolina Association of Realtors unhappy.
Expanding the sales tax to more items, an idea that was part of initial proposals in both the Senate and House, were not outlined in news releases initially distributed Friday. However, Tillis said the new plan will expand the sales tax base to some items that aren't currently taxed. That appears to have been a reference to things like movie tickets and utilities.
"Our tax reform plan is not just a tax cut here and there but meaningful tax reform – historic tax reform – that will spur economic development, create jobs and put more money into the pockets of hard-working North Carolinians," McCrory said.
The plan was quickly applauded by the conservative Americans for Prosperity, which has been pushing lawmakers to forge a deal for months.
"Not only does this deal significantly lower the personal and corporate income tax rates, but also it allows several tax loopholes to expire," Dallas Woodhouse, state president of the group, said in a statement. "This plan is real tax reform and good stewardship of the people’s money."
Critics of the plan point out that it abandoned earlier effort to close loopholes offered to certain industries.
"Real tax reform would focus on closing special interest loopholes and establishing a tax code that treats all of our hardworking taxpayers fairly," House Minority Leader Larry Hall said. "Instead, Gov. McCrory and the Republicans chose to make even deeper cuts to our schools just to ensure that the wealthiest individuals and corporations in North Carolina will receive huge tax breaks."
Top Republican lawmakers have said tax reform is "a process" and that they expect to make further tweaks to the tax code during future legislative sessions.
With a tax deal done, lawmakers are now free to turn their attention to the budget that spends the money taxes raised.
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