Senate offers “balanced tax relief”

The Senate rolled out their tax/finance proposal this afternoon. Senator Berger’s office gives a nice summary of what they are proposing:

• Extend the state Job Development Investment Grants (JDIG) program for an additional two years while providing an additional $5 million in one-time funding to enable the state Department of Commerce to catch up on grant awards. The bill will also:

o Create a new economic development tool for attracting major manufacturing projects – like automobile and aerospace manufacturers – that commit to investing at least $750 million and creating at least 2,000 new North Carolina jobs.

o Adopt safeguards proposed by the House to ensure job recruitment dollars are administered responsibly and available throughout the entire year.

o Respond to concerns that struggling, mostly rural areas have received limited support from state incentives programs by establishing more generous grants to companies that locate in poorer counties.

o Eliminate the hard cap on incentives in urban counties found in previous Senate proposals, as requested by the governor.

• Reduce the tax burden on North Carolina families and small businesses by cutting the personal income tax rate from 5.75 to 5.5 percent beginning in 2016. The legislation will also create a progressive zero percent tax bracket that year – ensuring all North Carolina taxpayers, regardless of income, will pay no state personal income tax on their first $17,500 of income. And it will increase the amount of nontaxable income even further over the next five years. Under the bill, 88 percent of taxpayers will pay less, pay nothing or see no change in what they pay.

“A major goal of tax reform has been ensuring fair tax relief for all North Carolinians – regardless of income level,” said Senate Finance Committee co-chairman Bob Rucho (R-Mecklenburg). “Further reducing the tax rate and increasing the zero tax bracket will help achieve that goal and provide significant relief to low-income earners, working families and small businesses across our state.”

• Allow families to claim all deductions offered by the federal government on their North Carolina tax returns – including those for medical, mortgage interest, property tax, charitable, education and other allowable expenses – up to a maximum of $20,000. Together with the increased zero tax bracket, the change will enable 85 percent of taxpayers to claim all deductions for which they are eligible.

• Keep the promise of lower corporate income taxes by allowing the rate to fall to four percent beginning in 2016 and three percent beginning in 2017. The state is already expected to meet revenue targets currently in place that will trigger the reductions. This change will provide certainty that North Carolina’s rate will soon be the lowest in the Southeast.

• Move to calculating corporate income tax on the basis of a single sales factor over three years, so businesses are not penalized for making large capital investments or hiring more workers in the state. Many neighboring states, including South Carolina, Virginia and Georgia, use a single sales factor formula, and this has put them at a competitive advantage over North Carolina.

• Allocate sales tax dollars fairly to ensure North Carolina’s local governments benefit from tax dollars paid by their own citizens. Over four years, the plan will provide that 80 percent of sales tax revenues are allocated based on where people live, with 20 percent allocated based on the county where a sale takes place. And it will eliminate outdated and unfair “adjustment factors” that redistribute sales tax revenues to a handful of counties. The changes will enable all areas of the state to receive a fair share of sales tax revenues while still supporting costs associated with providing services and infrastructure in large commercial centers.

“When the current, archaic sales tax system was put in place, North Carolina was a different state. But times have changed, and the outdated distribution policy is creating a major obstacle to job creation in rural areas,” said Senate Majority Leader Harry Brown (R-Onslow). “These reforms strike a balance with our incentives policy and allow all of North Carolina to share in economic prosperity – by giving our rural counties a fair shake while making sure our urban centers still benefit from incentives and sales tax dollars as they grow in population.”

The plan will also:

o Narrow the loophole that major corporations sheltering in nonprofit status are using to avoid paying their fair share of sales tax. Because they are classified as nonprofits, their first $666 million in purchases are not subject to tax, unlike other large businesses. Over five years, the bill will reduce the sales tax exemption for nonprofits to their first $15 million in purchases – still allowing nearly 99 percent of nonprofits to receive the full benefit of the exemption.

o Broaden the sales tax base to continue the goal of moving away from unfair and burdensome taxes on property and income. The bill will expand the base to include advertising, veterinary services and items proposed by the House as part of its 2013 tax reform package. It will also begin the process of eliminating a number of sales tax loopholes by applying the state rate and increasing maximum payment caps.

• Streamline and reduce the franchise tax by 33 percent – cutting what is effectively a statewide property tax on both large and small businesses.