North Carolina Leads States In Tax Reform

North Carolina Gov. Pat McCrory on July 23 signed a new tax reform bill into law, making his state one of the leaders in the South in the effort to attract new business development.

The tax reform package ranks as the most significant plan in the United States, reducing the top marginal tax rate from 7.75 percent now to 5.75 percent in 2015.  It also reduces the three-tier tax system to a single flat rate.  The plan will eliminate the personal income exemption while increasing the standard deduction. The standard deduction will be $15,000 for married taxpayers filing jointly, $12,000 for heads of household, and $7,500 for single taxpayers and married taxpayers filing separately.  Unlimited itemized deductions for charitable contributions will be allowed, while mortgage interest and property tax deductions would be capped at $20,000.

The corporate income tax rate would decrease from the current 6.9 percent to 6 percent in 2014 and 5 percent in 2015. The rate would decrease by 1 percentage point in each of the two succeeding years if certain tax collection triggers are met.  The corporate income tax rate would decrease to 4 percent in 2016 if during the 2014-15 fiscal year General Fund tax collections exceeded $20.2 billion. It would decrease to 3 percent in 2017 if during the 2015-16 fiscal year General Fund tax collections exceeded $20.975 billion.

Elizabeth Malm, an economist with the nonpartisan Tax Foundation, said that North Carolina ranks at the top of the nation in magnitude of tax reforms this year.  Malm said the changes would make North Carolina’s tax code friendlier for business, jumping the Tar Heel State from 44th to 17th in the Tax Foundation’s State Business Tax Climate Index.  That index takes into account personal and corporate income taxes, along with sales, unemployment insurance, and property taxes.

 “Even though [the plan appears] modest, it looks like it’s [more than] $700 million in tax cuts,” Malm said. Kansas, which approved a tax reform package last year, is the only other state that came close, Malm said.

“I think North Carolina is the big one in the South,” Malm said.

In addition, the plan simplifies tax collection by shifting many purchases that are taxed in other ways into the sales tax base. It also repeals some exemptions. For instance, live entertainment and movies, service contracts (warranties), manufactured and modular home sales, electricity, piped natural gas, and some previously untaxed bakery items and newspapers would be taxed at the state retail sales tax rate. The special taxes or exemptions that had covered those purchases were repealed.

The plan also ends the back-to- school and Energy Star sales tax holidays. Sales tax refunds for nonprofit organizations would be capped at $45 million, which the N.C. Center for Nonprofits said is unlikely to affect major nonprofits, including large hospital networks, in the immediate future. The center continues to oppose the cap, saying it could be lowered or eliminated in a later tax bill.

McCrory said tax reform was part of an overall strategy to increase job creation in the state.

Source:  The Tribute Papers at http://www.thetribunepapers.com/2013/08/19/north-carolina-gets-sweeping-tax-reform/