RALEIGH — Touting tax cuts as a cure for the states ailing economy, Gov. Pat McCrory and Republican lawmakers unveiled a consensus plan Monday to trim income taxes and limit future government spending.
The agreement to lower the personal and corporate income taxes to the lowest rates of neighboring states ended a months-long deadlock that threatened the GOPs top priority. Legislative leaders anticipate swift votes this week, with the House taking the first Tuesday, clearing the way for a state budget agreement before the legislative session ends next week.
Our tax reform plan is not just a tax cut here and there but meaningful tax reform, historic tax reform, that will spur economic development, create jobs and put more money into the pockets of hard working North Carolinians, said McCrory, with House Speaker Thom Tillis and Senate leader Phil Berger at his side. This will allow employers and citizens to have more money to buy things, to invest in our great state and create a more rewarding life.
Most taxpayers would get a tax break with the largest cuts reserved for high-income earners and those without children. A married couple with two children making $60,000 would save $84, a legislative analysis showed, while a single person earning $250,000 would save $4,000 a year. Any tax cut would be tempered by an increase in sales taxes on electricity, movies and service contracts, which are not factored into the projected savings.
The largest tax break would come from the states three-tier personal income tax. It taxes higher income at higher rates with the 7.75 percent the highest among neighboring states. The GOP legislation would create a flat 5.8 percent rate that moves to 5.75 percent in 2015. Only Tennessee, which doesnt have a broad income tax, would be lower.
Under the bill, the corporate tax, paid largely by only the wealthiest companies, would drop from 6.9 percent gradually to 5 percent by 2015. It could fall even further in the future, possibly down to 3 percent in 2017, if the state meets revenue growth targets.
A positive signal
Even with the accord, major questions remain particularly about whether it will lead to more jobs or make it more difficult for the state to offer popular government services to its growing population.
Flanked by Commerce Secretary Sharon Decker, McCrory said the legislation will spur the recruitment of out-of-state companies and help those located in North Carolina to expand. North Carolinas jobless rate remains the fifth highest in the nation at 8.8 percent.
It sends a positive signal to citizens and most importantly to job creators that North Carolina is open for business, McCrory said.
But a UNC-Chapel Hill economist told lawmakers earlier this year that such suggestions are exaggerated and not quantifiable. In that context, tax reform is a necessary, significant but insufficient means to address our states economic growth challenges, concluded Brent Lane in a legislative report.
It also remains an open question as to whether the tax deal satisfies Republicans pledge to reform the states tax code.
Economists and tax experts from across the political spectrum agree that North Carolina needs to revamp its tax code to make the state budget more stable in boom and bust years by broadening the sales tax to services and eliminating billions of dollars in special interest loopholes.
But facing political pressure, Republican lawmakers cut such provisions from earlier tax proposals.
If you are grading this as tax reform, it doesnt get there, said Roby Sawyers, a tax expert at N.C. State University. At the end of the day it probably looks more like a tax cut.
State Sen. Bob Rucho of Charlotte, a leading advocate for a wholesale overhaul, deflated his Republican colleagues exultations, downplaying the importance of the deal. He called it the first itsy-bitsy step toward tax reform.
Berger acknowledged lawmakers wanted to do more, but suggested the plan simplifies the code and equals tax reform.
Critics from all sides
Likewise, the deal puts McCrory in a tough spot. He pledged in his State of the State address earlier this year to keep any tax overhaul revenue-neutral, or offset any tax cuts with tax increases in other areas to keep government spending continuing at projected levels. Democrats and other critics contend this is his second broken promise in as many weeks, after saying he would sign the abortion bill after pledging in the campaign not to restrict access to the procedure.
The legislation reduces available money for state lawmakers to budget by $500 million in the next two years and more than $2.4 billion over five years. McCrory, who earlier this year proposed a $20.6 billion state budget, had expressed caution about such a move earlier this year but quelled his objections in announcing the plan.
We know the critics from both the left and the right ... will say its either too radical or not too radical enough, the governor said. I disagree with all of them. I think we are instituting strong, pragmatic, strategic change that North Carolina families need now more than ever.
Speaking later, Tillis echoed those remarks. He said the tax plan would provide enough money to pay for necessary government services and growth within limits that we think are responsible.
But Democrats see the opposite, saying now is the wrong time to cut state spending given the economic situation. Sen. Mike Woodward, a Durham Democrat, attended the announcement in the Capitol but left disappointed. They were making a compromise between a bad bill and a worse bill," he said. "Anything thats not revenue neutral is something I cant support. This is not going to provide that revenue" for needed government services.
Real tax reform would focus on closing special interest loopholes and establishing a tax code that treats all of our hardworking taxpayers fairly, said House Democratic leader Larry Hall in a statement. North Carolina needs a tax code that protects the middle-class and ensures everyone pays their fair share. The Republican proposal fails this basic test.
Republicans counter concerns about the legislation hurting low-income taxpayers, pointing to the new $15,000 standard tax deduction for a married couple and a $25 increase in the current $100 child tax credit for married couples making less than $40,000.
Another organization aligned against the bill is the N.C. Association of Realtors, which opposed to the $20,000 cap for deductions of mortgage interest and property taxes. The group called it a major policy shift that will increase the tax burden on housing and homeownership will hurt the overall goal of tax reform to improve North Carolinas economy."
Staff writer Annalise Frank contributed.