North Carolina flag NC lawmakers are close to reaching a budget deal that will provide more income tax relief.

Members of the North Carolina House and Senate have passed their own versions of a new state budget and are now working to reach a consensus deal before the end of the month, which marks the end of the fiscal year. A review of the significant tax provisions in the Senate and House budgets finds a number of pro-growth reforms that should end up in the final budget deal sent to Governor Roy Cooper (D), including accelerated and possibly additional income tax rate reduction. 

North Carolina’s personal income tax rate dropped from 4.99% to 4.75% at the beginning of 2023 and is going to continue falling every year until the end of 2026, when the rate goes to 3.99%. The House-passed budget accelerates the phasedown to 3.99%, achieving it two years ahead of schedule. The Senate budget, meanwhile, does that and also schedules further rate reduction, taking the rate down to 2.49% by the end of the decade. The final budget deal that is ultimately worked out, many suspect, could get the rate down to around 3%. 

Further reduction in the personal income tax rate will benefit small businesses across North Carolina, most of whom file under the personal income tax system. The House and Senate budgets also provide additional relief to employers by reducing the state franchise tax. 

Authorization of a limited number of casinos is also being discussed as part of budget negotiations. In a new article published in on June 16, ATR’s Patrick Gleason writes about the additional revenue that approval of new casinos would generate for state coffers and how that could be put toward future tax relief goals. That article comes in response to recent reports that some Republican legislators in North Carolina have told their colleagues they might vote against an income-tax cutting budget if it also authorizes new casinos. 

Aside from the personal income tax relief and franchise tax cuts that are likely to be included in a final budget deal, both the House and Senate budgets extend an expiring sales tax exemption for jet fuel. As in other states, ATR is urging North Carolina lawmakers to extend the sales tax exemption for jet fuel. Such an exemption is not a special carve out or give-away. Rather, the sales tax exemption for jet fuel is important to avoiding taxation of a key business input that, if taxed, would see higher costs passed along to consumers. 

While most of major tax policy changes on the table in North Carolina budget negotiations are supported by ATR, that’s not the case for one provision that imposes higher taxes a new business model known as car-sharing. Car-sharing platforms, which conceptually operate like home-sharing platforms but for personal vehicles, have sprung up in recent years and increased in popularity. This expansion of transportation options has been a boon to consumers, but incumbent rental car companies aren’t fans of the new competition and have been lobbying state lawmakers, not just in North Carolina but in states all over the country, to saddle car-sharing with the same punitive taxation that plagues rental car company customers. 

In seeking to lump higher taxes onto their new competition, legacy rental car companies neglect to mention a major tax advantage they have over car-sharing platforms, which is that their rental car fleets are not subject to sales tax, correctly so as a business input. People who generate income by lending their car out on a car-sharing platform, however, must pay sales tax on their vehicle purchase. 

Aside from the fact that rental car companies already hold this tax advantage over car-sharing, another reason North Carolina lawmakers should not hit car-sharing with higher taxes is because it would be a move in the opposition direction from where lawmakers should be taking the tax code. Rather than extend punitive and discriminatory taxation of rental cars to new transportation business models that are benefiting consumers, state legislators would do well to instead look to cut or phaseout the rental car excise tax. 

Taxes and fees add substantial costs to rental car bills, sometimes comprising nearly half of the total price, and do so in a regressive manner. “Car rental excise taxes are levied in concert with state and local sales taxes, airport concession fees, and vehicle license and registration recovery fees,” a 2019 Tax Foundation report on rental car excise taxes noted, which “has created a byzantine structure of taxes and fees, with effective tax rates on consumers often exceeding 30 percent.” 

It’s clear that travel taxes have gotten out of hand and it’s understandable that rental car companies don’t like the idea of facing competition that is not subject to the same onerous taxation. Yet eliminating such discriminatory and exorbitant taxation, not expanding it, should be the goal. Rather than seeking to impose punitive travel taxes on new business models that are benefiting consumers, ATR encourages North Carolina lawmakers and their counterparts in other state legislatures to instead “level the playing field” the pro-taxpayer way, by reducing or eliminating punitive taxes, not subjecting more people to them. 

ATR is not alone in calling for an end to rental car excise taxes. The aforementioned report by the non-partisan Tax Foundation made the case that “excise taxes on car rentals should be repealed and the broader tax regime reformed to conform to the principles of sound tax policy.” 

“Excise taxes on car rentals are unsound tax policy, as they narrowly target one industry in the hope of exporting the tax base onto nonresidents,” noted the 2019 Tax Foundation report, which also touched on the consumer response, pointing out that “Evidence shows that travelers reduce their demand for car rentals when taxes rise and travel across state lines in search of a better deal.”

The next two weeks will be consequential for North Carolina taxpayers, as legislators look reach a budget deal before the end of the fiscal year and the July 4th holiday. North Carolina lawmakers are planning to redraw federal and state district maps later this year, which means the sooner a budget agreement can be reached, the more time off legislators will have before the must return to Raleigh. Many questions remain to be answered, but the good news for North Carolina taxpayers is that they are poised to receive some level of income tax relief in the new budget, but exactly how much is one of a number of key details to be worked out in the coming days and weeks.