RALEIGH A far-reaching proposal by Republicans in the state Senate would slow government spending and affect the wallet of every North Carolinian as it slashes income tax rates and raises the cost of food, prescription drugs and more than 100 tax-exempt services.
Senate leader Phil Berger outlined the forthcoming legislation Tuesday, calling it a $1 billion tax cut that is the largest in state history.
“This is a huge change in the way North Carolina taxes its citizens, the way North Carolina generates its revenue to fund services that government provides,” said Berger, an Eden Republican and the Senate president pro tem.
It shifts the tax burden to consumption rather than income, a move that will disproportionately affect low-income taxpayers and families. A married couple with two children making $30,000 a year would pay an estimated $1,000 more in taxes each year, according to a calculator on a political website designed to support the plan. By contrast, a single taxpayer making $200,000 would get a $6,000 break.
Under the proposal: The state’s 7.75 percent personal income tax rate for the top bracket would gradually drop to 4.5 percent over three years, and likewise the 6.9 percent corporate income tax would fall to 6 percent. The estate tax, paid by only the wealthiest taxpayers in 2010, would be eliminated, and the business franchise tax would see a 10 percent reduction.
To offset the cuts, the state would apply a lower sales tax at 6.5 percent to roughly 130 services currently exempted, or essentially any service taxed by at least one state.
The list of nearly 170 types of services is based on a 2007 survey from the Federation of Tax Administrators, an industry professional group, and includes carwashes, landscaping, car repairs and professional services offered by attorneys, accountants, veterinarians and physicians. All together, the broader sales tax would generate about $2 billion in new revenue.
In addition, the plan would apply the 6.5 percent state sales tax to prescription drugs and food, which aren’t taxed at the state level. Nonprofits would also lose their ability to get a state sales tax refund on purchased goods and services. Social Security would face a state tax for residents who also draw other income. The proposal would eliminate many of the $9.2 billion in existing tax loopholes, but other exemptions would remain.
At the bottom line, the plan does not raise as much money at it cuts, leading to a $250 million reduction in state revenue in the first year and $1 billion less after three years. McCrory asked for a revenue-neutral tax plan in his budget; his spokeswoman declined to comment on the specifics of the Senate plan.
Scott Norris, a manager at Brown’s Alignment and Brake Service in Raleigh, is worried about charging sales tax on the labor his mechanics perform, saying his customers will pay the extra cost.
“My concern would be that it’s a shell game, they give it to you in one place and take it from you in another,” he said. ”
Berger touted the plan as fair to all taxpayers and a tax cut for the “vast majority.”
The plan represents a retreat for Senate Republicans who earlier this year announced intentions to eliminate personal and corporate income taxes, a proposal also floated by Gov. Pat McCrory while campaigning. And it is clouded with questions because the actual legislation remains unfinished as the legislative session enters its waning weeks.
Even in its more limited form, the measure faces an uncertain future with McCrory and House GOP leaders not completely on board with the Senate’s ideas. But Berger is confident the N.C. General Assembly will pass a tax overhaul this session.
“Our current tax system cannot be fixed by nibbling around the edges,” Berger said in announcing the plan
Change was overdue
The plan’s supporters said the overhaul is necessary to revamp an antiquated tax code and entice businesses to relocate to the state and create jobs. They noted the state’s 9.2 percent jobless rate in March multiple times.
North Carolina’s personal income tax rate for the top bracket is the highest in the Southeast, and the corporate tax rate is highest among neighboring states. The proposed cuts would make North Carolina more competitive with border states but not surpass them in all categories.
“The best way to fight poverty is with a job,” said Sen. Bob Rucho, a Charlotte Republican helping to push the effort. “What this is all about is creating economic opportunity and growth.”
Democrats agree the tax code needs to be updated. But they criticized the Senate plan, saying it represents a tax break for the wealthy and a tax hike for lower-income families.
“This plan actually amounts to the largest tax increase in North Carolina history on the middle class and working families,” Senate Democratic leader Martin Nesbitt said in a statement. “This plan takes those struggling the most and makes life a little harder.”
Even some Republicans expressed reservations. Rep. Tom Murry, a Morrisville Republican and pharmacist, said the prescription drug tax would “increase the cost of health care.”
Like many House members, Murry said tax reform is needed, but he stopped short of endorsing the Senate’s plan. “This is a top priority,” he said. “It’s overdue.”
(Raleigh) News & Observer staff writer Dan Kane contributed.
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