Agenda: Big questions in North Carolina may limit lawmakers’ effort to eliminate income taxes

January 26, 2013 

The outline of a plan to overhaul the state’s tax system is raising so many big questions that it prompts another: Is it too much to tackle this session?

Republican Gov. Pat McCrory and lawmakers promised to lower personal and corporate income taxes on the campaign trail but offered few details. And the only proposal so far, drafted by top Senate Republican lawmakers, is meeting a cool reception.

Senate leader Phil Berger and Sen. Bob Rucho, the finance committee chairman, put forth a proposal to abolish personal and corporate income taxes and strike business franchise taxes. To fill the $12 billion hole, the plan would eliminate all tax breaks, hike the sales tax and put a levy on services such as medical care, tax preparation and more than 100 others that are currently duty-free.

The combined state and local sales tax would increase from 4.75 percent to 8.05 percent, and it would apply to groceries, which currently are taxed only at 2 percent by local governments. The plan calls also for charging all businesses a franchise tax of 1.05 percent, tied either to net worth or to gross receipts. The minimum “license fee” would be $500.

Art Pope, McCrory’s budget director, has expressed personal “great concerns” about the proposal. State Treasurer Janet Cowell, a leading Democrat and fiscal authority, is making her discomfort known in relation to the state’s bond rating. Liberal groups say it will increase taxes on the middle class. And Republican House Speaker Thom Tillis recently told News 14 that it would take more than five months to unravel a 50-year-old tax code.

Nevertheless, Berger, an Eden Republican and Senate President Pro Tem, is pledging to take action. “We will have a tax reform package that gets passed in this session of the General Assembly,” he said.

The impetus driving the debate is an antiquated tax system based on a manufacturing economy, not the modern service economy. And Republicans believe lower rates will help attract jobs to the state – a point disputed by other business relocation rankings and partisan critics.

The state’s current personal income tax rate of 7.75 percent for the highest earners is the highest in the Southeast. North Carolina’s corporate tax rate is among the highest. The most likely outcome is a reduction in both taxes as a compromise.

Staff writer John Frank

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