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Tax Reform Deal Reached in North Carolina


Posted by Patrick Gleason on Monday, July 15th, 2013, 6:26 PM PERMALINK


This afternoon, North Carolina Gov. Pat McCrory (R), standing alongside Senate President Pro Tem Phil Berger (R) and Speaker Thom Tillis (R), announced that he and legislative leaders have reached a final agreement on 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 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 legislature is set to pass and send to the governor later this 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, the state will have one of the best.

“North Carolina voters made a decision last November to elect a more taxpayer-friendly and economically-literate state government. Today that decision is paying dividends, with the announcement this afternoon that Gov. McCrory and leadership in the General Assembly have reached a final agreement on a plan that will provide significant and much-needed tax relief for individuals, families, and employers across North Carolina,” said Grover Norquist, president of Americans for Tax Reform. “The compromise plan presented by Gov. McCrory, Speaker Tillis, and Senate President Berger today represents a huge improvement over the current tax code. Thanks to hard work by members of the legislature and their staffs, North Carolina will no longer have the highest income taxes in the South after the legislature adjourns later this month.”

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,” continued Norquist. “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.

Below is a breakdown of the tax changes implemented by this plan, as well as the change in North Carolina's business tax climate ranking as a result of the deal: 

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.

Other Changes

  • Retain full sales tax refund for nonprofits;
  • Cap gasoline tax; and
  • Fully repeal estate tax

The plan would most definitely 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:

 

Current Law

New Plan

Overall

44

17

Corporate Income

29

17

Individual Income

43

17

Sales

47

47

Unemployment Insurance

5

5

Property

36

27

 

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