RALEIGH (AP) — Gov. Pat McCrory and Republican legislative leaders on Monday announced a North Carolina tax overhaul deal, one that will cut individual and corporate income taxes and slightly expand the types of transactions subject to the state’s full sales tax.
McCrory, House Speaker Thom Tillis and Senate leader Phil Berger called the agreement historic, one they say that will make North Carolina more competitive with other states for business recruitment and job creation.
Berger, Tillis and McCrory pledged to work toward modernizing and simplifying the tax code this year, largely by cutting rates and eliminating exemptions that critics call loopholes. The plan was hammered out after months of discussions that picked up momentum in the last week. The General Assembly will act on it later this week and since Republicans have comfortable margins in each chamber, it likely will pass.
“This reform will put money in the pockets of North Carolinians,” McCrory said at a celebratory announcement in the House chamber of the old Capitol building with Tillis, Berger and Commerce Secretary Sharon Decker at his side. “It sends a positive signal to our citizens and most of all to job creators that North Carolina is open for business.”
The governor and legislative leaders said the package would reduce the number of individual income tax brackets from three brackets to one while raising the standard deduction and capping deductions on mortgage interest and property taxes. The current income tax rates of 6, 7 and 7.75 percent based on income would be reduced to a flat rate of 5.8 percent in 2014 and 5.75 percent in 2015.
These reductions are what McCrory wanted in a tax overhaul this year — he wanted the rates to be more competitive with surrounding states. The current top individual rate and the corporate rate are the highest in the Southeast.
The corporate income tax rate of 6.9 percent will fall to 6 percent in 2014 and 5 percent in 2015. The rate could go lower in future years if tax revenues grow at a strong enough clip. Decker said the plan “makes us much more competitive not only in the Southeast but also all around the world.”
The actual bill was immediately available Monday, but Tillis said the package would result in roughly $500 million less in combined revenue through mid-2015 compared to if no tax changes were made. Tillis and Berger said the plan will only reduce the growth of government spending, not reduce it overall.
The legislative leaders and McCrory defended the plan as true “tax reform,” although it leaves out what economists and other tax modernization advocates have said over the year are components of tax reform. They say it should include a significant broadening of the number of transactions subject to the sales tax — especially services — and it should be revenue neutral, meaning the proposal won’t immediately increase the state’s share of revenue compared to making no changes.
Tillis said expanding the sales tax will be discussed over the next several months. He and Berger said Monday’s package focused upon simplifying taxes, which they call a component of tax reform.
“This is tax reform that concentrates on other areas more than it does on the sales tax,” Berger said.
Democrats and their allies panned the deal as just a number of tax cuts that will benefit the wealthiest North Carolina taxpayers at the expense of low- and middle-class families.
“Their plan gives huge tax breaks to out-of-state corporations and millionaires while balancing those breaks on the backs of the middle class and working families,” House Minority Leader Larry Hall, D-Durham.
Alexandra Sirota of the liberal-leaning North Carolina Budget & Tax Center said “tax reform hasn’t been achieved” and the dwindling revenues will hurt education and infrastructure.
“We’ve been handed a plan that will tarnish our state’s reputation as a leader in the South, a place where people want to live and businesses want to grow.
The final package received an unlikely supporter in Sen. Bob Rucho, R-Mecklenburg, the chief architect of an earlier plan that would have greatly expanded the number of transactions subject to the sales tax as part of a move to a more consumption-based tax. He rejected later proposals from Senate Republicans as just “tax cuts.”
“This is the first itsy-bitsy step toward (comprehensive) tax reform,” said Rucho, who attended Monday’s announcement.
A tax deal opens the door for other negotiators to work out differences on a two-year state government budget that was supposed to be finalized before July 1. The agreement sets in place how much money the budget writers have to spend.