RALEIGH — Leaders in the North Carolina Senate this week floated a new round of corporate and personal tax cuts, unveiling a plan that reduces state revenues by $2 billion more over five years.
The plan would raise money in other places by beginning to charge sales tax on veterinary services and repairing personal property like furniture and appliances. Big nonprofits like hospitals will see their special treatment reduced and pay more in sales taxes.
The package responds to pleas by Gov. Pat McCrory to expand and extend a tax break used to lure job-creating companies that was due to expire after this year. But lawmakers want to alter the formula so that the biggest benefits go to businesses that land in rural areas where unemployment rates are higher.
“What you see is a fairly significant compromise on a whole lot of different ideas,” said Senate leader Phil Berger, R-Rockingham.
State Sen. Jane Smith, a Democrat representing Robeson and Columbus counties, said the bill changed in moving from the House to the Senate’s Commerce Committee, of which she is a member. A multitude of issues in addition to incentives have been added, she said.
“It’s not that this bill is all necessarily bad,” Smith said. “I’m just disappointed that so many issues of extreme importance are not being discussed individually and action taken individually on each issue.”
McCrory spokesman Josh Ellis said the governor’s staff was reviewing the proposal.
The General Assembly cut taxes in 2013 and legislative fiscal analysts projected that would reduce state revenues by $2.4 billion over five years. That projection anticipated a $438 million cut in state revenues this fiscal year. Instead, analysts now are expecting a $400 million surplus.
Though the Senate’s proposal for a two-year state budget isn’t expected to be offered until next week, it appears some of the surplus will go into tax cuts.
Senators propose cutting the personal income tax rate from 5.75 to 5.5 percent next year while more earnings would go untaxed. A married couple’s first $17,500 of income would face zero state taxes in 2017, up from $15,000 now.
North Carolina had a three-tier income tax system for decades in which the highest earners paid a higher tax rate than the middle class and working poor. The 2013 tax cuts converted that into a flat rate paid of 5.8 percent by all taxpayers. Those at the top end of the income scale who had paid the highest 7.75 percent rate saw their total income tax burden reduced by a quarter. Low-income taxpayers paying 6 percent got a more modest cut.
Senators now are proposing to allow more deductions, including restoring one for medical expenses after many seniors were shocked by higher tax bills this year.
The Senate plan also would follow through on earlier plans to reduce the corporate income tax rate to 4 percent next year and 3 percent in 2017.
Smith contends the corporate income tax rate is already low enough not to be a major deterrent to industries looking to locate in North Carolina.
“Having educated workers and economic development incentives are now more important to industries than the corporate tax rate when they consider a location,” Smith said.
Big nonprofit corporations that are now able to avoid paying sales tax on the first $666 million they purchase will see that exemption narrowed to their first $15 million.
The legislation incorporates a previously proposed plan to redistribute collected sales taxes from affluent cities and vacation destinations like Dare County to poorer, rural counties. Taking sales tax dollars away from the communities where they’re collected and allocating the money based on per-capita residents would mean more revenue for most of the state’s 100 counties while urban counties like Durham and Mecklenburg could see less.
The redistribution proposal is expected to benefit residents of Scotland County.