On July 15th Governor Pat McCrory, Senator Phil Berger, President Pro Tem of the Senate, and House Speaker Thom Tillis released a tax reform plan under a Proposed Conference Committee Substitute to House Bill 998. During the following two days, the House and Senate debated the plan. Democratic members in both chambers criticized the plan as a disproportionate tax cut for the wealthy which will result in cuts to essential government services.  Republican members responded that the plan will put money back into the pockets of all individual tax payers, not just the wealthy, and businesses.  This, they believe, will generate jobs and economic opportunities for all North Carolinians. Governor McCrory signed the bill into law on July 23,2013 releasing the following statements “I came to the governor’s office a few short months ago with a sense of urgency and resolve to put North Carolinians back to work, ... I firmly believe that this reform package will prove to be critically important to growing North Carolina's economy and getting people back to work.  This tax reform package puts more money in families’ budgets and will restore confidence for North Carolina businesses. Because of this package, job creators will think about relocating to our great state."

This plan is an historic change to the tax structure of North Carolina, a structure that had not been reformed since the 1930’s. Democratic members believe the shift in policy to lower taxes is a shift in the wrong direction because they believe it will actually result in a tax hike for many individual taxpayers and starve essential government services and programs.  There are some members that believe the plan may not go far enough, but all Republican members agree this plan is one step forward in the continuing process of tax reform, appropriately decreasing the size of government, and will have the effect of increasing revenue as it stimulates North Carolina’s economy. On the House floor during the Proposed Committee Substitute’s third reading, Representative David Lewis from Harnett County stated he believed the Proposed Committee Substitute will produce adequate revenue to meet the needs of our growing state.

Below please find some highlights from the proposed tax plan. 

Personal Income Tax

• Eliminates the three-tiered state personal income tax and reduces taxes from the current maximum rate of 7.75% and minimum rate of 6% to 5.8% in 2014 and 5.75% in 2015.

• Increases the standard deduction for all taxpayers, applied to the:

• First $15,000 of income for those married filing jointly

• First $12,000 of income for heads of household

• First $7,500 of income for single filers

• Retains the state child tax credit and increases it for families making less than $40,000

• Retains deductions for mortgage and property tax up to $20,000

• Allows full tax deductions of charitable contributions 

• Exempts Social Security from taxable income

• Eliminates deductions on retirement income

Corporate Income Tax

• Reduces the corporate income tax from 6.9% to 6% in 2014 and then to 5% in 2015, a 29% rate reduction

• After 2015, if state revenue grows and meets its goals it will trigger a tax cut to 4% in 2016 and 3% in 2017

Other Highlights

• Caps the state gas tax through June 30, 2015

• Eliminates North Carolina’s estate tax

• Exempts essential goods and services, such as food and drugs, from being taxed

• Eliminates sales tax holidays for back-to-school and Energy Star products beginning in 2014

• Expands taxable services to entertainment admission tickets and certain service contracts, while exempting out elementary or secondary school events, agriculture fairs, nonprofit entertainment events lasting no more than seven days, and youth athletic contest events sponsored by a nonprofit entity

• Caps nonprofit state sales tax refunds at $45 million in any one year