RALEIGH — Gov. Pat McCrory signed a major tax cut into law Tuesday, saying it would help ease the state’s economic pain.
The measure cuts personal and corporate income taxes to the lowest levels of neighboring states, starting with reductions in the 2014 tax year, and limits future state spending by more than $2 billion in the next five years.
Flanked by legislative leaders, the governor focused his remarks on economic development, saying the lower tax rates will help spur job creation in a state with the fifth highest unemployment in the nation, even as he cautioned it won’t cure the entire problem. “We’ve moved toward action; people are hurting,” he said.
McCrory and Republican legislative leaders struck a deal on the plan a week ago after months of consternation about the party’s signature legislative issue. But economists suggest the final measure doesn’t meet Republican’s pledge to reform the tax system to make it more stable.
It also represents a retreat for the governor, who pledged in the campaign and his State of the State address to make it revenue neutral, meaning it would not affect government spending.
What it does: The sweeping measure ends the state’s three-tiered personal income tax rates, and creates a flat tax at 5.8 percent in 2014 and 5.75 percent in 2015. The corporate tax rate falls from 6.9 percent to 6 percent in 2014 and 5 percent in 2015 with future decreases dependent on the state meeting certain revenue targets.
Other provisions in the bill increase the standard deduction, limit the mortgage and property tax break, end various personal exemptions and eliminate the sales tax holiday. The sales tax is expanded to cover movie tickets and some service contracts and more than doubles on electricity.
Who benefits: Republicans argue that every taxpayer will see a cut as a part of the new law but legislative analyses prove otherwise. Some families, retirees and small business owners may see a tax hike under provisions in the bill and all taxpayers will have to pay some additional sales taxes. The largest tax breaks will go to higher-income earners, particularly single taxpayers, who will see a larger proportional cut than a North Carolina household making the state’s median income of $40,000 a year.
What’s next: Republicans acknowledge the bill didn’t go as far as they wanted, particularly in eliminating billions of dollars in tax breaks for special interests. It asks a committee to keep studying the issue and look at preferential tax rates for certain industries and local governments’ ability to charge privilege taxes on businesses.