N.C. tax plans: The details

Below are more specific details about the differing tax-restructuring proposals from two N.C. senators. Neither proposal is likely to be adopted exactly as presented, because amendments and changes are likely as the measures move through will the N.C. General Assembly.

Clodfelter proposal

Details of the tax plan, Senate Bill 394, proposed by N.C. Sen. Dan Clodfelter, D-Mecklenburg:

1. Extend the sales tax to many services not now taxed and reduce the state sales tax rate from 4.75 percent to 4.5 percent.

2. Cap the personal income tax rate at 6 percent, repealing the 7 percent and 7.75 percent marginal rates.

3. Create a large income tax exemption (For instance, $11,000 for married couples filing jointly). Replace income tax deductions with income tax credits.

4. Reduce the 6.9 percent corporate income tax rate to 6 percent and eliminate credits.

5. Reduce the franchise tax rate by one third, and extend it to Limited Liability Companies (LLCs).

Rucho proposal

Details of tax plan from N.C. Sen. Bob Rucho, R-Mecklenburg. Note that Senate Bill 363 contains some, but not all, of Rucho’s total plan. The following details are based on correspondence with Rucho’s office:

1. Implement a multiyear program that gradually replaces the personal and corporate income taxes with a broad-based retail sales tax.

A) Extend the sales tax to all services enumerated by the Federation of Tax Administrators, as well as drugs and food purchased for home consumption.[1]

B) Phase in income tax rate reductions as increased sales tax revenue replaces income tax revenue.

C) Until the income tax is fully replaced, each household can exclude the first $15,000 of income.

D) The sales tax base would exclude business purchases that are capitalized for federal income tax purchases. The intent is to minimize sales tax on business-to-business transactions.

E) After the transition away from income taxes is complete, the combined state plus local sales tax rate will be 6.5 percent in most counties. The current rate is 6.75 percent.

2. Replace the franchise tax with a business license tax. The business license tax would be levied on all firms’ assets minus liabilities and accumulated depreciation (defined in the federal tax code).

3. Eliminate the estate tax, retroactive to Jan. 1, 2013.

4. When feasible, expand the real estate conveyance fee.

5. Eliminate special sales tax rates, e.g., the 1 percent tax on mill machinery.

Benjamin Russo is a professor of economics at UNC Charlotte. He can be reached at brusso@charlotte.edu.

–[1] A report on the FTA’s survey of sales taxation of services can be found at http://www.taxadmin.org/fta/pub/services/btn/0708.html#table

Benjamin Russo