This year North Carolina joined the growing number of states considering major changes to its tax system. Several major tax reform bills are now being considered. Three of these bills focus on lowering personal and corporate income taxes while expanding the state sales tax rate, each taking different approaches.
Senate Bill 394 creates a 5.95 percent flat tax on corporate and personal income while setting the sales tax rate at 6.5 percent. SB 394 would expand the sales tax rate to several new products that are currently untaxed.
House Bill 998, the “Tax Simplification and Reduction Act” takes a similar approach, creating a flat 5.9 percent tax on all income but coupling these cuts with a gradual decrease in the states corporate income tax to 5.4 percent. HB 998 would also implement an expanded and increased state and local sales tax rate. The North Carolina House of Representatives passed the HB 998 on its second reading on July 7 by a 72-32 vote. The next vote on the bill will be on July 10.
The last bill receiving serious attention is House Bill 677, the North Carolina Tax Fairness Act. Introduced in May by Senate President Pro Tempore Phil Berger, the Tax Fairness Act would lower the personal income tax rate to a flat 4.5 percent, down from a top bracket rate of 7.75 percent. Corporate tax rates would be reduced from 6.9 percent to 6 percent while adjusting how the corporate tax is calculated.
Designed to cover the revenue lost through the income tax reductions, the second component of HB 677 is an expansion in the state’s sales tax system. The plan would apply a 6.5 percent combined state and local sales tax to several products that are not currently covered, while increasing the current sales tax on groceries, which is currently a 2 percent local tax, up to the combined sales tax of 6.5 percent.
The Tax Fairness Act would also reduce the franchise business tax and eliminate the states’ estate tax. A franchise tax is levied on businesses and partnerships chartered within a state and, like all corporate taxes, are in reality really paid by customers (through increased product and service prices), employees (through lower wages), and others. Reducing the franchise tax and eliminating the estate tax will improve North Carolina’s competitiveness by removing a double taxation of businesses and individuals.
Eliminating the estate tax would create jobs and promote savings and investment while not penalizing individuals who saved for the next generation. Estate taxes, a form of double taxation, stifle investment and entrepreneurship, reduces economic growth, discourages savings, increases the cost of capital, raises interest rates and while raising relatively little revenue.
Lowering personal and corporate income taxes could dramatically improve North Carolina’s economy and generate new jobs. According to a study published by the North Carolina-based John W. Pope Civitas Institute, tax reforms similar to the current proposals could have gained North Carolina an estimated 217,000 to 378,000 jobs over the past decade.
High income and business taxes deter economic development by discouraging higher-income-earners and new capital from moving into a state, remaining there, or investing their money. This tax reform plan would improve North Carolina’s economic competitiveness by leaving more money in the pockets of the state’s citizens and businesses to spend, save, and invest.