Major corporate and personal income tax cuts are moving forward in the N.C. Senate, although some Democrats are opposing them because they worry the state will lose billions of dollars in needed revenue.
The Senate Finance Committee on Wednesday passed Senate Bill 325, titled “Billion-Dollar Middle-Class Tax Cut,” with a few Democrats voting no.
The plan – more sweeping than a House tax cut proposal under consideration this year – would reduce the personal income tax rate from 5.499 percent to 5.35 percent, which Senate Republicans say would be one of the lowest rates in the country.
The Senate plan would also increase the standard 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.
“Most all of this is in the rural areas, where people can take that money and plug it right back into the economy,” said Sen. Tommy Tucker, a Union County Republican and sponsor of the bill. “This really is a middle-class tax cut without question.”
But Sen. Floyd McKissick, a Durham Democrat, said the state can’t afford such sharp tax cuts while also funding school and infrastructure needs.
According to the legislature’s nonpartisan fiscal researchers, the tax cut would reduce the state’s expected revenue by $324 million in the first fiscal year, $710 million in the second year and more than $800 million in subsequent years.
“Between now and 2022, we’re talking about a $3.4 billion impact” to the state budget, McKissick said, adding that other efforts could more effectively address rural needs. “I think we can impact them more by putting good quality schools out there. I think we can do more by bringing the infrastructure there to make sure that employers want to go to those areas.”
Tucker disagreed and argued that tax cuts can stimulate the state’s economy, resulting in increased revenue. “That is the same rhetoric we heard when we cut our first billion dollars,” he said. “You are not considering the growth in our revenue, and that has happened.”
The Senate bill would also 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.
Under the new plan, the biggest child tax 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.
Some Democrats voiced concern about a corporate income tax cut in the plan that would reduce the corporate 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.
“I’m sure the families will be glad to have a tax cut,” said Sen. Gladys Robinson, a Greensboro Democrat. “My concern here is that as we continue to decrease the corporate tax, are we going to end up cutting services or raising sales taxes?”
Republicans noted that the corporate income tax cut is a small part of the plan, with a revenue impact of about $120 million in fiscal year 2018-2019. “When you get to corporate tax, you’ve got a lot of slick lawyers and accountants that can work really hard to get out of paying as much tax as they can,” Tucker said.
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, ultimately increasing the state’s revenue by about $10 million per year.