NC Capitol

NC Capitol

House, Senate tax reform plans unveiled

Posted May 30, 2013 2:32 p.m. EDT
Updated May 30, 2013 5:48 p.m. EDT

— State House and Senate lawmakers on Thursday unveiled three competing proposals to reform North Carolina's antiquated tax system.

There's widespread agreement in Raleigh that the system is in need of modernization. Its last major overhaul was in the 1930s, when the state's economy centered on agriculture and manufacturing. 

Lawmakers have tried to overhaul the system several times in the past two decades, but so far, they haven't succeeded. The sponsors of the three measures discussed Thursday believe they can change that.

The sponsors of all three measures say they would like to eventually lower corporate and personal income tax rates to zero, although none of the measures would get close to that goal in the first four years. 

Generally, the House bill, put forth by Rep. David Lewis, R-Harnett, can be thought of as a go-slow approach, setting up changes in the tax code but avoiding big shocks, such as requiring businesses that don't now collect sales tax to begin doing so.

The Senate plan put forward by Sens. Bob Rucho, R-Mecklenburg, and Bill Rabon, R-Brunswick, is the most aggressive of the three. It makes deeper cuts to corporate and personal income taxes by expanding sales taxes to more than 130 services that aren't currently taxed.

A second Senate plan by Sens. Dan Clodfelter, D-Mecklenburg, and Fletcher Hartsell, R-Cabarrus, stakes out a middle ground between the other two proposals. 

Senate leaders have not said which Senate bill will eventually move, but Senate President Pro Tem Phil Berger has publicly expressed his support for the Rucho plan. 

All three proposals will likely receive more debate in their respective chambers over the next two weeks. 

Income tax 

All three plans would flatten and lower the state's current three-tiered marginal income tax system:

  • House Bill 998, sponsored by Lewis, proposes a flat income tax of 5.9 percent.
  • Senate Bill 677, the Rucho plan, would drop the rate to 4.5 percent by 2016. 
  • Senate Bill 394, the Clodfelter plan, proposes a flat tax of 5.95 percent.

All three would also cut the state's corporate tax rate, currently at 6.9 percent:

The House plan lowers the corporate rate to 5.4 percent by 2016; the Rucho plan lowers it to 6 percent by 2016; and the Clodfelter plan drops it to 5.95 percent by 2014. 

Both Senate plans would make changes to existing tax law to favor companies with significant real estate or equipment in North Carolina. The Lewis plan does not.

The Rucho plan also carves out sales tax exemptions for many, but not all, business-to-business transactions.

Sales tax

The current state sales tax is 4.75 percent, with an additional 2 percent (or more) that goes to local governments. The combined sales tax rate throughout most of the state is 6.75 percent. 

All three plans lower the effective sales tax rate slightly but expand it to apply to more services. 

The House plan would keep the state portion of sales tax at 4.75 percent but would lower the local portion by 0.1 percent. Local governments would have to find the lost revenue elsewhere.

The Rucho plan would lower the overall sales tax to 6.5 percent but would do so by raising the state's portion to 5 percent while lowering the local portion to 1.5 percent. Again, local governments would have to find the lost revenue elsewhere. 

The Clodfelter plan would lower the state's portion to 4.5 percent, lowering the overall rate to 6.5 percent. 

New taxes

The Rucho plan would apply sales tax to prescription drugs, which are not currently taxed. It also raises the tax on groceries from 2 percent to the full 6.5 percent. The House and Clodfelter plans do not change the taxes on prescriptions or groceries.

The House plan and the Clodfelter plan would, in most cases, expand sales tax only to the installation or servicing of tangible material goods, like car repairs, computer warranties or furniture delivery.

The Rucho plan would expand the sales tax to apply to an additional 130 to 160 services by 2016, covering almost every service that is taxed in at least one other state.

Personal income tax deductions

The House plan includes a standard income tax deduction of $12,000 for a married couple filing jointly or itemized deductions (mortgage or charitable) up to $25,000.  

The Rucho plan would offer a tax-free bracket of up to $12,500. It also includes a sliding tax exemption for married joint filers making between $30,000 and $80,000. 

The Clodfelter plan offers a new "household" deduction of up to $5,000, as well as a "housing expense allowance" of up to $10,000 of mortgage interest. It caps deductions for charitable contributions. 

The House plan raises the child tax credit from $100 to $250. The Rucho plan leaves it at $100. Clodfelter's plan doesn't specify. 

Cost to the state

The House plan would cost the state an estimated $353 million over the coming two-year budget cycle.

The Rucho plan would cost an estimated $770 million over the coming two-year budget cycle. 

The Clodfelter plan would actually bring in additional revenue, creating an estimated reserve of $652 million in the coming two-year budget cycle. 

Other items of interest

The Rucho plan would remove tax exemptions for nonprofits and charities. It also would charge state income tax on Social Security benefits that are subject to federal taxes. That most often occurs when a retiree has multiple sources of income.

The House and Rucho plans would repeal the Energy Star tax holiday program on appliance purchases.

All three plans would add sales tax to movie and entertainment tickets, although the House plan keeps some current exemptions.

Taxes, ChangesHouse PlanSenate plan (Rucho)Senate Plan
(Clodfelter/Hartsell)
SALES TAX RATEDrops from 6.75 to 6.65 percent in most parts of state starting in 2014.Drops from 6.75 to 6.5 percent in Jan. 2015.Drops from 6.75 to 6.5 percent starting Sept. 1, 2014.
SALES TAXED ITEMSServices related to physical items, such as warranties and delivery, would be subject to tax.The number of services to which sales tax applies would expand over four years, eventually encompassing more than 130 services not currently taxed.More items, including some services attached to tangeable property, would be subject to sales tax starting July 1, 2014.
INDIVIDUAL INCOME TAX RATEStatewide flat 5.9 percent tax rate replaces three-tiered system.Statewide rate of 5.5 percent in 2014. That steps down over three years to 4.5 percent in 2016.Statewide rate of 5.9 percent.
INDIVIDUAL INCOME TAX EXEMPTIONSCan exempt first $12,000 of income or itemize deductions up to $25,000.$10,000 of income tax-exempt in 2014. That steps up to $12,500 in 2015.New, deductible housing expense allowance equal to the greater of $5,000 or the mortgage interest on the taxpayer's legal residence, not to exceed $10,000.
CORPORATE INCOME TAXRate drops from 6.9 to 5.4 percent over five years.Rate drops from 6.9 to 6 percent over three years.
* The bill also changes how the tax rate is calculated to be friendlier to manufacturers.
Rate drops from 6.9 to 5.95 percent.
* Repeals some tax credits.
* Makes corporate income tax more friendly to manufacturers and businesses with lots of equipment.
ESTATE TAXRepealed.Repealed.Plan does not show changes to the estate tax.
BUDGET IMPACTRequires $221.8 million in cuts over two years.Requires $770 million in cuts over two years.Does not require any reserve. Sets aside extra revenue to repay federal unemployment insurance debt.