While the chattering classes discuss whether tax reform can happen in Washington, legislators in the Tar Heel State are showing lawmakers on Capitol Hill how it's done. This afternoon, North Carolina Gov. Pat McCrory (R) will sign into law a historic overhaul of the North Carolina tax code. The final deal moves the state from a tiered personal income tax with a top rate of 7.75 percent, the highest in the South, to a flat 5.75 percent over two years. The plan also reduces the corporate tax from 6.9 percent to 5 percent over two years. If certain revenue targets are met, the corporate rate will fall to as low as three percent by 2017.
The final deal, which the North Carolina legislature passed last week, is the result of more than a year of planning and months of negotiations. North Carolina currently has one of the worst business tax climates in the nation; after Gov. McCrory signs this tax overhaul into law today, the state will have one of the best.
Americans for Tax Reform and other supporters of the plan contend that this tax overhaul will boost economic growth and make the state more attractive to employers and investors. Currently, North Carolina has the highest unemployment rate in the region.
“For decades in North Carolina, taxes only went in one direction: up,” said Grover Norquist, president of Americans for Tax Refrom. “Fortunately for North Carolina taxpayers, the state is under new management and, as this pro-growth tax plan demonstrates, open for business again. North Carolina lawmakers will head home from Raleigh this Summer having delivered on one of their top campaign promises. Members of Congress and national pundits continue to debate the prospects for tax reform in Washington, I commend North Carolina lawmakers for demonstrating what pro-growth tax reform looks like.
Already we are seeing officials in other states point to North Carolina's tax reform as a model. New Jersey Senate Republican Leader Tom Kean Jr. made the follwing remarks the same day the North Carolina tax reform act was approved by the legislature last week:
“Tax cuts and rate overhauls authored by state leaders in North Carolina mirror proposals created by Senate Republicans and Gov. Chris Christie to make New Jersey more affordable for families and attractive to job creators...If Senate Democrats continue to block tax cuts and legislation sponsored by Republicans and Democrats, then New Jersey can expect to endure a continuation of outmigration that is splitting up families and chasing innovators away to our competition states, namely North Carolina, which has significantly lower business and personal tax rates.”
Below is a breakdown of the tax changes and how this reform will change in North Carolina's business tax climate ranking:
Individual Income Tax
- Flatten and lower rate to 5.75 percent by 2015;
- Increase standard deduction to $7,500 (for singles);
- Allow full deductibility of charitable contributions;
- Fully exempt Social Security income from state income tax;
- Allow for certain itemized deductions (total of mortgage interest and property taxes paid would be capped at $20k); and
- Retain current child credit of $100 for those earning $40k and increase credit to $125 for those earning under $40k.
Corporate Income Tax
- Reduce rate to 5 percent by 2015;
- If certain revenue targets are met, rate would decrease to 4 percent in 2016 and 3 percent in 2017.
- Retain full sales tax refund for nonprofits;
- Cap gasoline tax; and
- Fully repeal estate tax
The plan would improve North Carolina’s State Business Tax Climate Index score. Currently, North Carolina ranks 44th in the country. The new agreement would move the Tar Heel State up to 17th best. Scores for other tax categories are found below: