State Senate leaders want to change how much tax relief is available to homeowners and people with children.
Senate Republicans also pitched sweeping cuts to personal and corporate income tax rates as part of a plan they say would save businesses and individual taxpayers a combined $1 billion a year.
According to Senate Finance Chairman Tommy Tucker, “Ninety-nine percent of all income taxpayers will either receive a tax cut or pay zero income tax.”
Republican House and Senate leaders both unveiled tax cut proposals this week. The House plan wouldn’t change the overall tax rates but would raise the standard deduction and change some business taxes to reduce the amount companies pay in machinery and franchise taxes.
House leaders estimate their plan would save personal income taxpayers a total of $64.5 million in the 2017-18 fiscal year and $124 million in the 2018-19 fiscal year. Businesses would save a total of $135.8 million per year.
“The Tax Reduction Act of 2017 will continue to lower personal income taxes for the middle class, lower taxes on large and small businesses alike located in North Carolina, and attract manufacturing jobs,” House Finance Chairman Jason Saine said in a news release Thursday.
The proposed tax cuts are already drawing fire from Democrats and left-leaning groups – particularly the Senate plan – with concerns that the cuts could leave the state with inadequate revenue to fund schools and other key services.
“Preliminary review of the proposal suggests that the people who will carry the heaviest load for the Senate’s unbending resolve to give tax breaks to the wealthy will be poor, low-income taxpayers and the communities that are struggling because too few dollars are being invested in them,” said Alexandra Sirota, director of the liberal N.C. Budget and Tax Center.
The N.C. Democratic Party issued a news release saying Senate leader Phil Berger “seems intent on reheating the same tired trickle-down economics that gave us years of sluggish growth under Gov. (Pat) McCrory.”
From the time McCrory became governor to late 2015, North Carolina had the nation’s fastest growth in economic output, the 19th-fastest growth in per-capita income and the 11th-fastest growth in total income, PolitiFact North Carolina found in April 2016.
This year’s proposals are the latest in a series of income tax cuts since Republicans took control of the state legislature in 2011.
Here’s a breakdown of how the Senate and House proposals differ:
Tax rates: The Senate wants to reduce the personal income tax rate from 5.499 percent to 5.35 percent, which it says would be one of the lowest rates in the country.
The House plan would leave the personal income tax rate unchanged.
Standard deduction: Both the House and Senate plans would increase the standard deduction, which is the base amount of income that isn’t taxed unless a taxpayer chooses itemized deductions.
The Senate plan would increase the deduction from $17,500 to $20,000 for a married couple filing jointly, with similar increases for other tax status categories. Because a married couple making less than $20,000 wouldn’t owe any income taxes, the Senate estimates the change would take 94,000 families off the tax rolls, many of them in rural counties.
The Senate plan would move the state “closer to the (Senate) goal of phasing out state income taxes,” according to a Senate Republican news release.
The House plan would increase the deduction from $17,500 to $18,500 for a married couple filing jointly, with similar increases for other tax status categories.
So here’s what the deduction and rate changes would mean if you’re a married couple filing jointly with an annual income of $80,000: Under the Senate plan, your annual tax bill would drop about $220 to $3,210, assuming you took no other deductions. Under the House plan, your bill would drop about $50 to $3,380.
Other deductions: While the House proposal would only change the standard deduction, the Senate wants to adjust deductions used by homeowners and parents.
The state’s current tax credit for families with children would change to a deduction for families earning less than $120,000 annually. The biggest deduction – $2,500 – would be for families earning less than $40,000, with the amount of the deduction decreasing at higher income brackets. The current child credit is available to families earning less than $100,000 and ranges from $100 to $125 per child.
For homeowners who don’t use the standard deduction, the amount of mortgage interest and property taxes they could deduct would increase from $20,000 to $22,000.
Sales taxes: While the legislature has moved in recent years to expand sales taxes to more services, neither the Senate nor House bill makes any changes to sales taxes paid by consumers.
“I don’t anticipate the sales tax base being broadened this year,” Tucker said. “I don’t see any fee increases. The folks have sent us an ample amount of revenue.”
Business taxes: The Senate wants to reduce the corporate income tax rate from 3 percent to 2.75 percent in 2018 and to 2.5 percent in 2019 – something GOP leaders say will attract more companies to the state.
The Senate plan would also switch to a tax calculation system called “market-based sourcing,” which would base companies’ tax burden on the income they receive from customers in North Carolina – instead of their employment and capital investments in the state. Some companies would benefit from the change and others could pay more.
Senate Republicans would reduce and tweak the franchise tax, which they say would reduce taxes by up to $1,300 on small businesses that are organized as S-Corporations.
The House plan also addresses the franchise tax in a way leaders estimate will reduce total tax collections by $85 million. In addition, House Republicans would make purchases of major manufacturing machinery exempt from machinery taxes, which would save companies an estimated $50.8 million per year.