RALEIGH As the North Carolina House debates amendments to the 2016 Appropriations Act, House Bill 1030, this week, which modifies the current two year budget, further tax reform policy has emerged in the way of the standard deduction increases in both chambers.
The initial budget released by the House of Representatives Tuesday increases the standard deduction by $500 in 2017 to $16,000 for those married and filing jointly. By 2020, the zero bracket, a level under which all income is tax free, will reach $17,500.
Senate bill 818 (S818), debated in the Senate Finance Committee on Wednesday, goes even further. The Senate plan increases the zero tax bracket on an accelerated schedule, increasing the bracket by $1,000 for 2016, and a total of $2000 in 2017, bringing it to $17,500 for those married and filing jointly three years ahead of the House plan.”This bill we’ve got before us is targeting the middle class specifically,” said Sen. Bob Rucho (R – Mecklenburg), co-chairman of the Senate Finance Committee. “75,000 tax payers will be taken off the roles completely.”
If adopted, the Fiscal Research Division of the General Assembly estimates S818 would cost approximately $200 million in lost tax revenue when fully implemented. Rucho says 80% of that figure equates to earnings kept by married joint filers with incomes of $80,000 or less.
Gov. Pat McCrory’s State Budget Director Andrew Heath, in a letter to the House this week regarding the proposed budget, worries, though, that the tax change endangers revenues for further spending priorities.
“The House budget includes $92 million in additional proposed tax changes, including an increase in the individual income tax standard deduction that reduces revenue by approximately $200 million annually once fully phased-in. We share your desire to continue the trend of implementing positive tax reforms, however, existing law includes significant additional tax reductions to personal and corporate tax rates that have yet to take effect,” Heath said in the letter.
The letter goes on to point to targeted state employee raises and achieving teacher pay goals as top priorities for the McCrory Administration, both conceivably threatened by feared revenue shortfalls relating to zero bracket expansion.
Sen. Ben Clark (D-Raeford), however, shares the McCrory Administration’s concerns over potential lost revenues.
“Remember, whenever we talk tax cuts, the flip side of that is we talk about revenue reductions. We’ve had quite tax cuts over the last three years since I’ve been here in the General Assembly, and some of them I’ve actually supported, but we get to a point where we may need to say let’s do a time-out here. Let’s make sure that we give everything the opportunity to stabilize, make sure that we continue to bring the revenue that is sufficient in order to support the needs of the state before we continue forward with additional tax cuts,” Clark said of the proposed zero bracket expansion. “We’d much rather see those revenues go to paying for pay raise for teachers, state employees and providing additional services that the citizens of our state expect.”
Rucho thinks the abundance of caution is unwarranted.
“There is no reason to delay this for years. It is important and imperative because of the fact that we’ve seen dollars in excess of what we anticipated. That [money] belongs to the tax payers and we believe that this $2000 zero bracket [increase] will exactly do what we hope and that is go to the tax payer,” Rucho said. “Specifically last year we created $1.3 billion in new money above the previous year and out of that was about $450 million surplus. This year we achieved about a $320 million surplus above what we expected. What that means is something that we’re doing is right.”
Clark, though, wants to make sure tax cuts benefit those in the most need.
“We also want to make sure those tax breaks are targeted to meet the needs of those individuals who are in the greatest need of having some sort of tax break,” Clark said.
According to Barry Boardman of the Fiscal Research Division, the Senate’s proposed increase to the standard deduction primarily benefits the middle and lower classes.
“Of that $200 million [revenue loss], almost $180 million of that cost, if you will, is returned to those with income below $100,000,” Boardman said. “Above $100,000, almost all of those folks are going to be taking itemized deductions.”
Rucho described the tax move as “in essence, squeezing it from the bottom” to in time reach a $25,000 zero bracket level, while continuing to push rates further down from the top, in an effort to flatten and eventually eliminate income taxes and transition toward a consumption based tax policy instead.
“At some point, I would hope that North Carolina would reach a level of zero personal income tax,” Rucho said Wednesday. “The historic tax changes that this General Assembly has supported, including sales tax reduction, corporate income tax, personal income tax, zero bracket, has driven the economy forward and made us significantly, let’s say, more effective in delivering what our promise was, and that was to establish a competitive economic model so that business can grow here, flourish here, and create jobs and put our people back to work.”
McCrory has previously expressed his aversion to eliminating personal and corporate income taxes altogether, citing risk to revenues, instead favoring a “balanced” tax regime not too dependent upon any one tax revenue source.
Exactly how these tax policy differences among the State’s top Republicans are resolved will be borne out as the General Assembly amends and passes final budget considerations over the coming weeks.
House leaders expect to hold final votes on their budget bill, including tax changes, Thursday, while the Senate zero bracket bill, S818, has been placed on the Senate calendar for Monday. The Senate will release their full budget proposal after the House.