June 16, 2015
In the North Carolina General Assembly, the Senate amended House Budget Bill (HB 117) on Thursday to remove the House budget provisions and include their issues. The Senate version of the budget bill was filed on Thursday, June 11, and includes lower personal income tax rates, a change in corporate taxes, a new formula for distributing sales tax revenue among counties, and a retooled jobs incentive program.
Further expansion of sales tax: To balance the effects of cuts in income tax, the bill would broaden the sales tax base. Among the purchases facing sales taxes: Advertising, veterinary and pet care services, and repairs and maintenance work performed on tangible personal property such as cars. Recall that such work performed under service contracts are already subject to sales tax. Large nonprofits would face much smaller caps on annual sales taxes they could recover. In addition, a long-standing cap on tax of $80 per item charged on certain machinery and equipment would be eliminated, being replaced by a cap of $500 per item. This would affect the manufacturing and distributions industries.
Personal income taxes: The personal income tax rate would be cut from 5.75% to 5.5% beginning in 2016. The standard deduction would increase gradually over a four-year period, meaning that by 2020 a married couple filing jointly wouldn’t owe income taxes on the first $18,500 of income. A single person wouldn’t owe taxes on the first $9,250 of income. In addition, beginning in 2016 certain Federal itemized deductions, including medical expenses, previously eliminated for NC purposes would be reinstated, but a cap of $20,000 will apply to total itemized deductions.
Corporate taxes: Over the course of three years starting in 2016, income tax rates would decrease from the current 5% to 3%. The state would also begin using a single sales factor formula for calculating corporate taxes over this period. In the end it would calculate a company’s tax liability based entirely on sales instead of also factoring in their payroll and property. The Bill also proposes a reduction in the franchise tax rate, with a corresponding increase in the minimum amount due by most corporations from $35 to $200.
Sales tax redistribution: The bill includes a new distribution formula for allocating sales tax revenue among counties. Over a four-year period the state would transition to distributing 20% of revenue based on where sales occur, and 80% based on each county’s population. The new version of the distribution plan would allow counties to decide how they allocate revenue between city and town governments.
Incentives: The bill would provide funding for the Job Development Investment Grant (JDIG), the state’s main job incentive program. The JDIG program has been out of money for months. The state could generally offer up to $15 million in total incentives each year and up to $30 million if certain other conditions are met. The incentive amount available to a given business would also be limited to a percentage of tax withholdings received from employee jobs created. Modifications were also proposed to the state’s One NC incentive program.
Should the House not choose to accept this Bill as written, further negotiation will happen in a conference committee of legislators, which often occurs behind closed doors.
JPS encourages you to contact your representatives to discuss what is being proposed in this legislation.