Tax Reform 2013
The First Step on the Path
to Economic Growth and
Fiscal Stability
in North Carolina
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Why Do We Need
Tax Reform in
North Carolina?
1
A Surprising Statistic
Despite being one of the “Best Business
Climates” in the U.S. during the last decade
according to Site Selection Magazine & other
publications, in NC:
 Job creation is not keeping up with workforce
growth
 Job growth, unemployment, & poverty is
worse than the U.S. average
 From 1990 to 2000, we were 11th in U.S.
wage and income growth;
 In 2009, North Carolina was 45th
 In 2010, we were 48th
2
Economic Success---and Failure
NC Per Capita Income as a % of US Average Has Been
Decreasing Since 1997
95
1997: 92.88
93
91
1989: 89.08
89
2009: 87.62
87
2011: 86.7
85
1973: 83.14
83
81
79
1982: 81.44
1969: 79.14
77
75
1969
1972
1975
1978
1981
1984
1987
1990
1993
1996
1999
2002
2005
UNC Center for Competitive Economies
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NC MEDIAN HOUSEHOLD INCOME HAS
DECLINED EVERY YEAR SINCE 2000
10.9 % DECLINE SINCE 2000
Source: U.S. Census Bureau cited in Raleigh News &
Observer Article in February, 2013
NC Economic Development Spending
(Cumulative)
$6,725,966,540
$7,000,000,000
$6,000,000,000
$5,402,783,885
$5,000,000,000
$4,180,679,410
$4,000,000,000
$2,917,405,768
$3,000,000,000
$1,616,170,002
$2,000,000,000
$378,340,914
$203,437,950
$1,000,000,000
$0
FY 03-04
FY 04-05
FY 05-06
FY 06-07
FY 07-08
FY 08-09
FY 09-10
Slide 5
NC Job Creation Performance 2000-2010
Job growth has lagged behind workforce
growth for at least 12 years
Slide 6
1970
1980
1990
2000
2010
Manufacturing
35.2%
32.7%
25.5%
18.8%
10.8%
Government (incl. Military)
21.1%
19.6%
18.5%
18.1%
21.1%
Trade, Transportation and Utilities
18.5%
18.1%
19.6%
18.7%
17.8%
Services
14.9%
19.2%
25.2%
32.0%
39.1%
Financial Activities & Information
5.4%
5.5%
5.8%
6.5%
6.7%
Construction, Agriculture & Mining
5.0%
4.9%
5.4%
5.9%
4.5%
Shrinking Sales Tax Base
• The sales tax base has narrowed significantly over 40 years
 The bar graphs below indicate how North Carolinians spend
$100 of their income as a % of items subject to sales tax
 We spend a smaller % of our income on items subject to
sales tax now than in the 1970’s & more on services not
subject to sales tax
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Sales Tax Base Erosion
From Presentation by Economist Michael
Mazerov to Senate Finance Committee in 2009
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State Tax Structure
FY 1970-71
FY 2011-2012
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Overreliance on Unstable
Income Taxes for State Revenues
20% of General Fund revenue comes from these two volatile
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sources.
Why Tax Reform Was (Is) Needed
• Pitiful job growth & increasing poverty in NC
• Steadily decreasing per capita income and
median household income
• Major changes in how NC economy functions
• Steadily shrinking sales tax base
• Increasing reliance on volatile income taxes
• Increasing budget deficits
• Unsuccessful economic incentive programs
• Overly complex and confusing tax statutes
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Suggestions to Senate Finance Committee by
Four Independent Experts on 6/11/13
• North Carolina’s current tax code is outdated
and unsuitable for our changing economy
• Economic incentives have not produced jobs
• Need lower income tax rates (especially
corporate) & broaden sales tax base to more
services
• Reduce sales taxes on B2B transactions
• Tax reform alone is not enough but is
necessary for job and income growth
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TAX SIMPLIFICATION AND
REDUCTION STATUTES
 House Bill 998, S.L. 2013-316
 House Bill 112, S.L. 2013-363
 House Bill 14, S.L. 2013-414
The Most Sweeping Changes to NC’s Tax
Code in Many Years
Basic Components of Tax Law
Changes
PIT
CIT
Estate Tax
Sales
Electricity
Piped Gas
Motor Fuel
Tax Cap
Personal Income Tax
• Flat rate v. current
rate brackets
– 2013 = 6%, 7%, and
7.75% (Current rates)
– 2014 = 5.8%
– 2015 and thereafter
= 5.75%
• Enhanced child
credit
– $125 per child if AGI
< $40,000 (new)
– $100 per child if AGI
< $100,000 (current
law)
• Eliminate personal
exemptions
– One per taxpayer
and dependents
– Current amounts:
• $2,000
• $2,500 if AGI <
$100,000
• Increase standard
deduction to
$15,000 (MFJ)
– $6,000 (MJF) (Current
amount)
Personal Income Tax Changes –
Itemized Deductions
• Currently, all federal itemized deductions
allowed
• Effective 2014, only two deductions
 Home mortgage + property taxes paid on real
estate allowed on federal return
• Capped at $20,000
 Charitable contributions allowed on federal
return
Other federal deductions eliminated
•
•
•
•
Medical expense deduction
Unreimbursed employee expenses
Miscellaneous deductions
Personal property taxes
Items Eliminated
No fewer than 40 tax exemptions, deductions,
credits, or refunds were eliminated or allowed
to sunset as provided
Broadens the tax base
Simplifies the tax code
Eases compliance and administration
Personal Income Tax
Items that will Expire
• Credit for premiums paid on long-term
care insurance
• Earned income tax credit
• Credit for adoption related expenses
Personal Income Tax
Items that were Repealed
• Personal exemptions
• Tax Credits
– Child care expenses
– Disabled
– Property taxes paid on farm machinery
– Education expenses
– Non-itemizer charitable contributions
Personal Income Tax
Items that were Repealed
• Deductions from income
– Retirement income
– Severance wages
– $50,000 business income deduction
– Many itemized deductions
– Parental savings trust fund
– Firefighter & rescue squad
– Payment for erroneous conviction
Corporate Income Tax Changes
• Reduce flat rate of 6.9%
– 2014 = 6%
– 2015 = 5%
• Trigger for possible future rate reduction
– 2016 = 5% or 4%
– 2017 = 5% or 4% or 3%
• Triggers
– FY14-15 GF revenues =/> $20.2 billion
– FY15-16 GF revenues =/> $20.975 billion
Corporate Income Tax
Items that will Expire
• Credit for manufacturing
cigarettes for exportation
(2018)
Items that were Repealed
• Deduction for certain
telephone subscriber fees
• Deduction for savings &
loan supervisory fees
Personal & Corporate Income Tax
Tax Credits that will Expire
•
•
•
•
•
•
•
•
•
•
•
•
Ports charges
Recycling oyster shells
Renewable fuels
Work opportunity
Interactive digital media
Article 3J
Qualified business venture
Film (2015)
Renewable energy (2016)
Historic & mill rehab (2015)
Low income housing (2015)
Railroad intermodal (2038)
Tax Credits Repealed
• Construction of dwelling
units for handicapped
• Real property donations
• Conservation tillage
equipment
• Gleaned crops
• Construction of poultry
composting facility
Tax Preferences Retained
• Personal Income Tax
– Deduction for all social security income
– Deduction for “Bailey” retirement income
– Child credit
– Standard deduction
• Corporate Income Tax
– Credit for research and development (2016)
– Credit for investing in a major recycling facility
(no change from current law)
SALES TAX CHANGES
•
•
•
•
•
Rate changes
Additions to the sales tax base
Elimination of exemptions
Sales tax refunds
Various effective dates
Rates
• No change in the State tax rate of 4.75%
• No change in the local tax rates of 2% to
2.25% (Mecklenburg rate of 2.5%)
• Manufactured homes
– Currently 2% with $300 cap
– State rate of 4.75%, effective January 1, 2014
– No local tax
• Modular homes
– Currently 2.5%
– State rate of 4.75%, effective January 1, 2014
– No local tax
Sales Tax Base Expansion
• Amusements
–
–
–
–
January 1, 2014
Live events
Movies
Attractions for which
admission charged
• Exemptions
– School events
– Nonprofit events (2)
– Agricultural fairs
– Youth sporting events
– State attractions
• Service contracts
– January 1, 2014
– Agreement by which seller
agrees to maintain or repair
tangible personal property
(TPP)
– Not labor
• Exemptions
– TPP exempt from sales tax,
except motor vehicles
– Items used to fulfill service
contract
– Asset on utility owned
property
– TPP sold to motorsports for
which a sales tax refund is
allowed (S.L. 2013-414)
Eliminate Sales Tax Exemptions
Repealed January 1, 2014
• Nutritional supplements
sold by chiropractors
• Meals sold in higher
educational facilities
• Newspapers
Repealed July 1, 2014
• Bakery thrift store
• Sales tax holiday for school
• Sales tax holiday for certain
energy star products
Other Sales Tax Changes
• Exemptions for farmers
– Annual gross income requirement from farming
activity of $10,000
– Effective July 1, 2014
• Tax refunds for nonprofits
– Cap at $45 million State and local
(~ $666 million of purchases)
– Effective July 1, 2014
• No change to tax refunds for local
governments
• Extend sunsets for passenger air carriers &
motorsports for two years, January 1, 2016
ELECTRICITY & PIPED NATURAL GAS
Effective July 1, 2014
Electricity
Current Law
• 3.22% franchise tax
– Embedded in electricity
rates
– Subject to local
distribution
• Sales tax
– 3% residential
– 2.83% for dry cleaners
– 0% for manufacturers &
farmers & datacenters
Effective July 1, 2014
• Eliminate franchise tax
– Utilities Commission
directed to change rates
accordingly
• Increase sales tax rate
– State rate only
– General combined rate
of 7%
– Local distribution
formula
– Retain current
exemptions
Piped Natural Gas
Current law
• Exempt from sales tax
– Embedded in utility
rates
– Subject to local
distribution
• Excise tax on a per therm
basis
• Exemptions for
manufacturers, farmers,
and datacenters
Effective July 1, 2014
• Eliminate excise tax
– Utilities Commission
directed to change rates
accordingly
• Subject to sales tax
– State rate only
– General combined rate
of 7%
– Local distribution
formula
– Retain current
exemptions
ESTATE TAX
• House Bill 101 eliminates estate tax
• Effective for decedents dying on or after
January 1, 2013
• Reduces General Fund revenues by ~ $52 million
MOTOR FUEL TAX
Caps tax rate at 37.5 cents per gallon
Effective October 1, 2013, through June 30, 2015
House Bill 966; SCS for House Bill 998
What is the Price of
Inaction?
• The long term costs of failure to continue
with major, meaningful tax reform are
obvious from the economic information
presented—continued decrease in personal
income, increasing poverty, budget deficits,
unemployment, etc.
• Everyone agrees the current tax code is
antiquated and simply not adequate for NC’s
new economy---- it MUST be changed
Follow-up
Questions-Comments-Suggestions
robert.rucho@ncleg.net
919-733-5655
michael.hannah@ncleg.net
919-715-8348
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