Legislators look to cut NC income taxes by raising standard deduction

State legislators could consider further income tax cuts this year that could save families up to $115 per year.

A legislative committee heard a report Tuesday on raising the standard deduction for personal income taxes by $2,000. The standard deduction is the base amount of income that isn’t taxed unless a taxpayer chooses itemized deductions.

Under the proposal, a married couple filing jointly wouldn’t owe taxes on their first $17,500 in income – up from $15,500. For a single person, the deduction would increase from $7,750 to $8,750.

Legislators also reviewed a draft bill that would change how corporate income taxes are calculated for companies that do business in multiple states. A “market based sourcing” approach would base those taxes on the revenue the company receives from customers in North Carolina.

Both changes could be formally introduced when the full legislature returns in late April.

While Republicans have heard criticism that their previous tax cuts benefited the wealthy, leading lawmakers said Tuesday that a higher standard deduction wouldn’t have that effect.

“It really benefits the middle- to lower-income folks,” House Majority Leader Mike Hager said.

The legislature’s nonpartisan research staff presented calculations showing that a married couple making about $44,000 a year would save $115 each year with the change.

The average savings at other income levels would be more modest. Projections show savings of about $60 for families making between $10,000 and $30,000 per year. Higher income brackets would see little impact, with less than $10 in tax savings for families making more than $200,000.

The change would mean that 70,000 to 75,000 additional filers would owe no income taxes because their income would be less than the standard deduction, according to staff projections. The state revenue drop would be between $195 million and $205 million per tax year.

If legislators approve the change during their short session, it would be the second increase in the standard deduction since last year. The budget approved in September raised it from $15,000 for a married couple filing jointly to $15,500. Legislators also set a drop in the overall income tax rate from 5.75 percent to 5.499 percent starting in 2017.

Democrats and the liberal N.C. Justice Center say the state should restore the earned income tax credit instead of focusing on the standard deduction.

“Raising the standard deduction is not as efficient as an EITC, which targets families that pay a higher share of income in total taxes,” tweeted Tazra Mitchell, a policy analyst for the Justice Center. “You can only claim the EITC if you work. Previous analysis shows it is far less costly.”

The other tax change under consideration involves corporate income taxes for service-oriented companies that do business in multiple states. Companies are currently taxed based on their employment and capital investments in the state.

Under the draft legislation unveiled Tuesday, companies would instead pay taxes on the income they receive from customers in North Carolina. The change would benefit companies that have extensive property and staff in the state but provide products and services to out-of-state customers.

Tech companies who provide software support across the country could find the formula appealing. “It seems like it drives these high-tech companies into North Carolina,” Hager said.

Legislative staff said they don’t yet know how that change would affect state revenue, but hope to have estimates when legislators return in April.

This story was originally published February 9, 2016 at 6:38 PM with the headline "Legislators look to cut NC income taxes by raising standard deduction."