In a press conference this morning, chairmen of the Senate Finance Committee unveiled a tax cut plan projected to save taxpayers more than $1 billion over the coming biennium. Following are the highlights from the plan:
- Personal income tax changes: Lower the rate from 5.499 to 5.35 percent effective 2018. Also, increase the standard deduction from $17,500 to $20,000 for married filing jointly, and $8,750 to $10,000 for single filers. Changing the existing child tax credit to a sliding scale that falls as income rises. For those with family income under $40k, the credit would rise to $2,500 per child, and drop by $500 per every $20k increase in income; up to $120k when it falls to zero. For those who itemize, the mortgage interest and property tax deductions are increased.
- These changes are estimated to save taxpayers nearly $300 million in their first year, and $600 million the following year.
- According to a press release, the increase in the standard deduction will remove about 94,000 families from state income tax liability. Together with increasing child tax credits, families of four earning less than the federal poverty level of $24,600 would be exempt from NC state income tax.
- The removal of these additional families, according to the release, would “move North Carolina closer to the goal of phasing out state income taxes.”
- Corporate tax cut: the corporate tax rate would fall from 3% to 2.75% in 2018, then to 2.5% in 2019. This is estimated to save those taxpayers nearly $120 million over the next two years.
- Simplify and reduce franchise tax on small businesses: would create a flat $200 franchise tax on the first $1 million of a businesses’ net worth. This is projected to save businesses nearly $20 million a year once implemented.
- Move to market-based sourcing: this would include a change in how service-based revenue is apportioned for tax purposes, moving to where the income-producing activity is performed. This change is estimated to increase taxes on net for those affected by $15 million over the coming biennium.
Sponsors of the legislation claim that 99 percent of NC taxpayers would pay less or no state income taxes under this plan, with the majority of benefits going to families earning less than $50k per year.
Overall, the plan is projected to generate total tax savings of $324 million in the 2017-18 fiscal year, and $710 million in FY 2018-19.
These changes will no doubt help to further improve North Carolina’s business climate, and stimulate continued economic and job growth. One area of concern, however, is how the plan strays from a main principle guiding recent tax reforms: broaden the tax base to help lower rates. By expanding the standard deduction and bringing more people off the tax rolls, and by failing to expand the sales tax base, the tax base becomes narrower and thus rates remain lower than they could otherwise be.