The House and Senate are divided on how quickly to start an income tax cut aimed at middle-class taxpayers.
Both chambers are moving forward with plans to raise the standard deduction for personal income taxes by up to $2,000. The standard deduction is the base amount of income that isn’t taxed unless a taxpayer chooses itemized deductions.
The change would amount to a tax cut of up to $115 per year. The vast majority of households that would benefit make less than $100,000 per year.
The Senate version of the plan passed the chamber’s Finance Committee unanimously on Wednesday. The bill would increase the standard deduction from $15,500 to $16,500 for married couples filing jointly this year, with an additional increase to $17,500 next year. For a single person, the deduction would increase from $7,750 to $8,750 over two years.
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The legislature’s nonpartisan research staff presented calculations showing that a married couple making about $44,000 a year would save $115 annually with the change. Projections show savings of about $60 for families making between $10,000 and $30,000 per year. And 70,000 to 75,000 additional filers would owe no income taxes because their income would be less than the standard deduction.
“This is a targeted tax cut for the middle class and will go a long way toward helping reduce some of their tax burden,” said Sen. Bob Rucho, the Mecklenburg County Republican who sponsored the bill. “To vote against it would be to vote against the middle class.”
The House budget proposal expected to be approved Thursday includes the same income tax change — but would phase it in over four years starting in 2017. The standard deduction for married couples filing jointly wouldn’t hit $17,500 until 2020.
House leaders have said revenue needs don’t allow for the cut to take effect sooner, but they say it’s an important goal. “This will allow the working families and those that tend to be at the lower end of the income stream to retain more of the money they have earned,” said Rep. Bill Brawley, a Mecklenburg County Republican.
But Rucho says the tax cut shouldn’t have to wait. “There is no reason to delay this for years,” he said, dismissing the idea that the state needs the revenue. “That belongs to the taxpayer.”
According to projections from legislative staff, the Senate plan would cost $145 million in the fiscal year that begins in July and $205.4 million the following fiscal year. About $180 million of that second-year cost would go to taxpayers making less than $100,000, according to legislative economist Barry Boardman.
Of taxpayers in higher income brackets, Boardman said, “almost all of those folks are going to be taking itemized deductions” and aren’t using the standard deduction.
Senate Democrats are supporting Rucho’s plan. “We’re in favor of tax benefits for the lower and middle class, and that’s one way to do it,” Senate Minority Leader Dan Blue said, adding that the party would also like to see tax credits aimed at working families.
Blue said he’s not concerned about the Senate plan’s impact on state revenue. “It still would make sense to give this tax relief and recover whatever the loss is at some other point on the tax table,” he said.
While this year’s tax proposal doesn’t help people at higher income levels, they’ll still see lower taxes. Last year, the legislature set a decrease in the overall income tax rate from 5.75 percent to 5.499 percent to take effect in 2017. Further rate cuts are possible in future years.
“At some point, I would hope that North Carolina would reach a level of zero personal income tax, similar to Florida and Tennessee,” Rucho said, adding that he’d also like to see the standard deduction increase to between $20,000 to $25,000.