RALEIGH The median North Carolina family would get a modest tax break while wealthy taxpayers may see a significant cut under a sweeping bill primed for a landmark House vote Friday.
A married couple with two children making $40,000 a year would get an estimated $40 tax break when the legislation is fully implemented, according to a new legislative analysis. If the same family earned $250,000 a year, it would see a roughly $1,700 break. The tax cut increases to at least $12,500 if the family makes $1 million.
All single taxpayers would see a tax break with the size increasing with income. At $40,000, the tax cut is about $200, while the break for those making $100,000 would be about $1,000, the analysis estimated.
The numbers set the stage for a House debate on what bill sponsors are calling the biggest tax cut package in more than a decade and their top legislative priority.
Crafted by the Republican majority, the House measure is expected to easily pass and move next week to the Senate, which is advocating for a much more far-reaching overhaul of the state tax code.
Backed by Gov. Pat McCrory, the House legislation cuts personal and corporate income taxes by raising the sales tax on electricity bills and removing the sales tax exemptions on dozens of services. All installation, repair and maintenance services, such as car repairs and appliance deliveries, that are now tax-free would have to pay a combined state and local 6.65 percent sales tax, a slight decrease from the current rate. The estimated affects of the bill take into account both the income tax cut and the sales tax hikes.
“This bill is a major step in the ongoing process of tax reform,” said Rep. David Lewis, a Dunn Republican and primary sponsor. “Under the plan, the working families of North Carolina will receive more dollars in their pocket and our state will become more competitive in job creation.”
The House Appropriations Committee approved the bill Thursday on a voice vote after clearing an internal dispute among Republican lawmakers that delayed the measure earlier this week.
The legislation proposes trimming the personal income tax to a flat 5.9 percent next year and gradually reducing the corporate tax from 6.9 percent to 5.4 percent by 2018. In addition to the new service taxes, the bill would add sales taxes to movie, concert and many amusement tickets. A change to the bill Thursday removed a cap on deductions for charitable contributions.
Unlike the Senate plan, the House measure does not tax groceries, prescription drugs or Social Security income.
The total package carries a new $1.7 billion price tag over five years and leaves lawmakers with $302 million less to spend on government services in this year’s two-year budget. The House plans to begin discussing its budget proposal Friday and vote next week. The Senate has already passed its budget and the two chambers plan to reach a compromise version by June 30.
Republican lawmakers say their tax plan preserves adequate revenue to cover law enforcement, transportation and other budget priorities. But Democratic state Rep. Verla Insko of Chapel Hill, speaking against the bill in committee, said the loss in tax revenue is too big a price to pay.
“We are cutting our essential services,” she said. “We are making cuts that are going to compromise the future of many of our children and the future of our state.”
Democrats are expected to make numerous attempts to soften the measure in the floor debate Friday with amendments designed to focus tax cuts on low-income taxpayers and not the wealthy.
GOP leaders emphasized that a legislative analysis released late Thursday showed that all taxpayers would see a tax break under House Bill 998.
“It’s really kind of a false criticism of the plan to say the rich get more of a tax break,” Lewis said. “The fact is those who make more money continue to pay more in taxes, those who make less pay less in taxes. We are giving all of them a break.”
Alexandra Sirota, the director of the N.C. Budget and Tax Center, a group opposed to the bill, said pure dollars distort the numbers. The center used a different model to gauge the affects of the legislation and forecast that 95 percent of taxpayers, or those making less than $169,000, on average would see their tax burden increase, compared to higher earners.
The median household income in North Carolina is roughly $46,000, according to the U.S. Census Bureau. Sirota said the sales tax expansion would proportionally hit lower- and middle-income families harder because they spend more of their income on goods and services.
“Looking at just dollar amounts is not really reflective of the proportion of their income – because that’s a critical measure,” Sirota said. “A dollar for a low-income family makes a much bigger difference than an upper-income family.”
The state’s current personal income tax is tiered. For a single taxpayer, the first $12,750 is taxed at 6 percent and additional income up to $60,000 is taxed at 7 percent. Any dollar over $60,000 is levied a 7.75 percent rate, the highest in the Southeast. The rates are the same for other types of filers, such as married couples, but the income thresholds are different.
Democrats object to the proposed flat income tax. Rep. Paul Luebke, a Durham Democrat, noted in a recent committee meeting that it means “a family making $40,000 will pay at the same income tax rate as a family making $4 million.”
Republican bill sponsors contend such a system is more fair.
To minimize the legislation’s effects on low- and middle-income families, the House plan would double the standard deduction to $12,000 for a married couple filing jointly, or $6,000 for a single filer, making it one of the most generous in the nation. It also would more than double the child tax credit for families making less than $100,000 a year to $250.
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