Senate Passes Tax Reform Compromise Plan

AccountingThe North Carolina Senate approved a substitute Tax Reform plan last week, with hopes of reaching an agreement with the House after both chambers return from the holiday weekend.  The plan is essentially a hybrid of the original Senate and House reform efforts, but a LONG way from the sweeping overhaul embraced by Senate President Pro-Tem Phil Berger and Matthews Senator Bob Rucho just two months ago. Here are the key points:

  • Eliminates North Carolina’s three-tiered personal income tax bracket system and replaces it with a 5.75% flat rate, about midway between the House and Senate proposals;
  • Caps mortgage interest and property tax deductions at $15,000 for all filers, the same as the Standard Deduction for married couples filing jointly. This is a reduction from the House proposal, which allowed a more generous $25,000 MID & Property Tax cap.
  • Allows unlimited charitable deductions, as the House proposal does;
  • No tax on Social Security benefits, as per the House plan;
  • Reduces the corporate income tax rate from 6.9% to 6.4% in 2014, and gradually phases it out completely by 2018. The House plan would have gradually cut it to 5.4%.
  • Gradually reduces the Business Franchise Tax, eliminates it by 2018;
  • Establishes an annual flat Business Privilege Tax of $3,500 for C Corps & $500 for all other business entities.
  • Modestly expands sales tax to service contracts, but not to labor; no tax on food or medicine.

The big question is still how much less revenue any Tax Reform effort will leave the state. The latest Senate proposal will cut more than $3.28 billion from the budget over the next 5 years, nearly double the amount cut by the House plan. Governor Pat McCrory has indicated his preference for a revenue-neutral plan, or at least something that comes close. So while the House and Senate appear to be coming closer on a plan, it’s still uncertain whether the final outcome would find acceptance in the Executive Mansion.

And then there’s the Mortgage Interest Deduction. While the latest Senate plan reinstates it, the $15,000 cap is far lower than the amount allowed by the House plan, which could mean a tax increase for significant numbers of North Carolina homeowners. We hope members of the General Assembly continue to look for ways to maintain the MID in its entirety, as this deduction is crucial to the still-recovering housing industry in our state.

You can review the latest Senate plan, along with helpful comparison charts, on the Finance Committee website.

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