ASHEVILLE — Most North Carolinians will see more money in their paychecks under an income tax overhaul though business owners and the state’s poorest will pay more in taxes.
The tax overhaul would result in $524 million less in combined revenue through mid-2015, according to government projections. Gov. Pat McCrory will sign the tax bill into law today.
Both sides of the political spectrum have different takes.
“To call it tax reform it would be an optimistic claim,” said Cedric Johnson, public policy director of the Budget and Tax Center at the progressive N.C. Justice Center.
“The tax reform bill will make North Carolina more attractive to job creation and new business,” said John Hood, president of the conservative John Locke Foundation.
Some key points:
• The income tax rate drops to 5.8 percent for everyone, meaning the wealthy stand to gain more than others. The corporate rate drops to 5 percent.
• Families with children will have more in taxable income, singles will have less.
• Retirees with private investments will lose a longstanding deduction.
• Businesses won’t be allowed to shelter the first $50,000 in income from taxes.
• The poor — 900,000 of them — will lose the earned income tax credit.
• Admission tickets and sales of mobile homes will be taxed.
“This is a step along the way,” said Rollin Groseclose, chairman of the N.C. Association of Certified Public Accountants tax modernization task force, which is nonpartisan. He’s a certified public accountant for Johnson Price Sprinkle in Asheville.
Tax rate cut
The biggest impact on paychecks comes from a decreased income tax rate. The rate will drop to a flat rate of 5.8 percent. It had ranged from 6 percent to 7.75 percent with those making the least paying the lowest rate.
The biggest reduction under the flat rate will come for those making the most money.
The CPA group, which advised legislative staff, said the plan moves toward weaning the state off income taxes, which some economists say are not dependable for government budgets.
North Carolina, in recent years, has seen revenues fluctuate as the income level of the tax base swelled and declined with the economy. The economy has also shifted from one based on manufacturing goods to one based on providing services, most of which are not currently taxed.
Loopholes have long been something that critics point to when they explain why the state’s tax policy should be streamlined. Some of the loopholes, or deductions, that got cut this time will mean more taxable income for some people.
Those who were married and filing jointly with two children under the old law got a $10,000 exemption plus a $6,000 standard deduction. Under the new law, the exemption is gone and there is only a $15,000 standard deduction, which means an extra $1,000 in taxable income.
Single folks fared better. Under the old law, they got a $2,500 exemption, plus a $3,000 standard deduction, for a total of $5,500. The new law gives them a $7,500 standard deduction, which means $2,000 less taxable income.
The new law puts a $20,000 cap on real estate mortgage interest and property taxes. In the past, there had been no limit. This could impact the wealthy, who tend to have more mortgage interest. Under the old law, income from private retirement, such as 401(k)s, individual retirement accounts and other investments, got a $2,000 deduction per taxpayer. That will end with the new law.
Small businesses in 2011 got a big tax break from the state. They were allowed a $50,000 net deduction.
The break was meant to encourage business growth. It ends in 2014 and could mean businesses that are already struggling to turn a profit will pay more in taxes.
Corporate taxes are now 6.9 percent but will drop to 6 percent in January and 5 percent in 2015.
If state revenue goals are met, the taxes will drop to as low as 3 percent — making North Carolina the most competitive state in the Southeast in terms of corporate taxes.
A low rate, some economists and lawmakers say, will help attract more large corporations. On downside for corporations, job creation tax credits will expire.
Also, some large businesses will lose tax breaks for investing in equipment and real estate. That could hurt companies like New Belgium Brewery, which had planned to build its new brewery in Asheville this year, and might have gotten a break, but has since pushed the expansion off until next year.
Some Republicans had wanted to expand sales taxes to a wide range of services, including all kinds of repairs, personal services ranging from haircuts to massages and services like those attorneys provide. Pet grooming, commercial linen supplies and window cleaning would have also been taxed.
But lawmakers settled on only expanding the sales tax to services that operate under contracts to maintain equipment. Manufacturing equipment maintenance companies, office equipment companies and information technology companies could fall into this category.
Admission tickets, which had been tax-exempt, will now be taxed.
Farmers, even those who didn’t make a living or only made a small amount at the local tailgate market, have long been able to avoid sales taxes on equipment and supplies. That will change for some under the new law, which requires farmers to make $10,000 in gross revenue a year to qualify for the sales tax break.
Good or bad?
Johnson, the Budget and Tax Center public policy director, said the plan does not broaden the base as conservatives had said they wanted to do. The middle class and the state’s poorest residents will pay more, he said.
The wealthy will benefit the most, with 53 percent of the rate cut going to the state’s top income earners. The middle class will have more taxable income on the books and pay more with the slight expansion of sales taxes.
The poor, those who make less than $12,000 a year, will lose the earned income tax credit. That plan means several hundred dollars annually for 900,000 North Carolinians, he said.
Hood, the John Locke Foundation president, disagrees with the criticism that the budget doesn’t bring in enough to cover state services.
Most states with lower income and corporate rates grow faster than those with higher rates, he said. A better economy, Hood said, means decreased Medicaid spending, which is the state’s biggest expense.