Before a packed press room at the State Legislative Building, Senate President Pro-Tem Phil Berger (R-Eden) joined Senators Bob Rucho (R-Matthews) and Bill Rabon (R-Southport) to outline the Tax Fairness Act, their vision for achieving a more than 3-point reduction in North Carolina’s personal income tax rate, along with a nearly 1 percent cut in the corporate rate. The reductions would occur over 3 years, and be largely funded through a dramatic expansion of the state sales tax to more than 100 services that are presently exempt. Which services specifically would be taxed is unclear, and likely to remain that way until actual legislation is filed sometime before the end of May.
The absence of a bill also leaves everyone guessing as to the other provisions in the proposal, but here’s what we could surmise from the press conference:
- The personal income tax would drop from a top rate of 7.75% to a flat rate of 4.5% in 3 years. AGIs below $15,000 would be exempt by year 3 of the plan.
- The corporate tax rate would drop from 6.9% to 6.0%, and the calculation for multi-state corporations would change to a “Single Sales Factor” would tax only those sales in North Carolina.
- The state portion of the sales tax would expand, but the rate would drop from 6.75% to 6.5%.
- The state’s Franchise Tax will be expanded to all business entities, including LLCs and sole proprietorships. No mention of what the rate would be, but similar proposals have Franchise Taxes ranging from 0.125% to 0.135%, with a minimum annual fee of $500 and a maximum of $5,000 (except for holding companies, which would pay more).
- Businesses that pay the Franchise Tax would enjoy an exemption from the sales tax on all Business-to-Business transactions.
- Berger mentioned that all federal tax deductions are protected — which is nice, since the State of North Carolina has no authority to repeal them. There was no mention of protecting any state tax deductions, such as the Mortgage Interest and Property Tax deductions, which might lead one to assume they are NOT protected in the proposal.
“Make no mistake,” Berger said, “there are a variety of special interests who would prefer to preserve the status quo, and the special treatment that they’ve been accustomed to for decades, at the expense of the average family. It’s not our role as elected officials to pick the winners and losers in our economy.”
The Berger/Rucho plan is already feeling heat over its proposed sales tax expansion, which would effectively be a tax increase on those families that don’t currently pay any income tax in North Carolina. Berger directed anyone with questions to try out the Tax Calculator on his Tax Fairness Act website, but a day later, the Civitas Institute, a pro-Tax Reform group, was calling that same Calculator “misleading,” after press reports showed that lower-income households would pay more.
Another indication of the uphill battle facing the proposal is the decidedly lukewarm reception it received by House Speaker Thom Tillis and Governor Pat McCrory. Neither were represented at yesterday’s press conference, and Tillis could muster no greater compliment than calling the proposal a “positive first step.”
REBIC will continue to track this proposal, along with the others that are slowly winding their way through the General Assembly. We’ll let you know as soon as actual legislation is produced, but until then, you can watch a video of yesterday’s press conference HERE.