RALEIGH — A bill filed in the N.C. Senate seeks to lower individual state income tax rates, increase standard deductions and alter some corporate tax calculations.
Senate Bill 337, the Tax Relief and Recovery Act, was filed in March by primary sponsors Sens. Paul Newton (R-Cabarrus), Warren Daniel (R-Burke) and Bill Rabon (R-Brunswick).
The bill would lower the individual income tax from 5.25% to 4.99% and would allow the first $25,500 of a family’s income to be tax-free. The legislation would also increase the standard deductions from $21,500 to $25,500 for married, filing jointly; $16,125 to $19,125 for head of household; and $10,750 to $12,750 for single and married, filing separately.
The state’s current child deduction amount would be raised by $500 for each tier of a taxpayer’s adjusted gross income. As an example, the current state tax law has a deduction of $2,500 for couples married/filing jointly who make up to or over $40,000. That couple’s deduction would rise to $3,000.
The bill would cap corporate income taxes at $150,000 and would make changes to the franchise taxes in the state.
“In our state, we have a pernicious tax on job creators that we were going to reduce by a third, and we did that successfully until the governor vetoed the budget last time,” Newton told North State Journal in an interview. “We’re taking a different approach this time in this tax reduction bill, and the franchise tax is calculated and payable on the highest of three calculations.”
Newton explained that the first calculation, which will remain in place, is the net worth calculation.
“Multi-state corporations typically are paying this [net worth] where they may be in multiple states,” Newton said. “They have to calculate their net-worth and then a portion to North Carolina, which is attributable to the customers they’re selling goods or services to up here in North Carolina. That’ll remain intact. That is 75% of the franchise tax revenues today.”
“But the other two legs are particularly onerous for businesses, because you have to calculate either actual value of tangible property in the state, and pay on that, or the appraised value of your tangible property in the state, and pay the franchise tax on that,” said Newton. “The problem with that is that it taxes companies like startups or any company that doesn’t have a net worth — even if they’re not making any money.”
Newton said this “discourages capital investment” and discourages businesses from putting an “iron in the ground” in North Carolina, as well as discouraging job creation.
“It makes it much harder, in my view, to attract and retain startup companies because we’re taxing you even though you’re not even above water yet financially,” Newton said. “I think it’s a big step in the right direction of reducing tax burdens on businesses and job creators in North Carolina and helps your mom and pops. It helps your small businesses.”
Prior to the pandemic, in 2019, Cooper vetoed a bill that contained franchise tax cuts. In his veto message of Senate Bill 578, Cooper claimed it “prioritizes corporate tax cuts over investments in education” and that “cutting taxes for corporations at more than $1 billion over five years will hurt North Carolina’s future.”
Despite the governor’s claim, the state has posted multiple budget surpluses since Republicans began enacting tax reform policies, many of which were over $400 million. For example, in 2019, Cooper’s office predicted a $600 million budget shortfall; however, that August the General Assembly’s Fiscal Research Division announced an estimated $896 million surplus. That same year North Carolina’s economy was ranked No. 3 in the country by CNBC.
“I can’t speak for the governor or what he might want to do,” said Newton when asked if the governor might veto the bill once passed. “But I will tell you this, in no uncertain terms, that we have to continue to create a structurally sound environment for job creators in North Carolina, or we will get left behind by our competitors.”
Under the Republican-led tax reforms, the state’s corporate tax rate went from 6.9% in 2011 to 2.5% in 2020. Similarly, the personal income tax rate in the state went from 6-7.5% in 2011 to 5.25% in 2020 paired with increases in standard deductions.
Newton said there is no “finish line” and that the state needs to keep looking for ways to convince job creators that “this is the state they want to make their 50-plus year capital investment in.”
“To me the follow-on question is — can we afford these tax cuts? And the answer to that is a resounding yes,” said Newton. “After the tax cuts and after the statutorily required transfers to the SKIFF and the Rainy-Day Fund, we still have an availability $4 billion higher than this year’s base budget.”
Newton said the fiscal impact would be around “$150 million growing slightly over a four year period.” The changes would become effective fiscal year 2022-23.