In a rare moment of unity on tax policy, the N.C. Senate voted unanimously Tuesday to cut income taxes for the middle class by raising the standard deduction by up to $2,000.
The standard deduction is the base amount of income that isn’t taxed unless a taxpayer chooses itemized deductions. The change would amount to a tax cut of up to $115 per year, and the vast majority of households that would benefit make less than $100,000 per year.
“We are targeting the middle class in a big way,” said Sen. Bob Rucho, the Mecklenburg County Republican who sponsored the bill.
While the Senate’s tax cut plan got support from Democrats, House leaders are pursuing a similar tax cut that takes effect more slowly.
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The Senate bill approved Tuesday would increase the standard deduction from $15,500 to $16,500 for married couples filing jointly this year, with an additional increase to $17,500 next year. For a single person, the deduction would increase from $7,750 to $8,750 over two years.
The House budget approved last week, however, would slowly raise the standard deduction starting in 2017, reaching $17,500 for married couples in 2020. House leaders have said the more cautious approach is needed for a balanced budget.
Rucho, however, thinks the cut should be immediate.
“To wait four years is like dribbling it out,” he said, noting that the state is seeing budget surpluses. “That is the taxpayers’ money and should be returned to the taxpayers.”
The legislature’s nonpartisan research staff presented calculations showing that a married couple making about $44,000 a year would save $115 annually once the change is fully implemented. Projections show savings of about $60 for families making between $10,000 and $30,000 per year. And 70,000 to 75,000 additional filers would owe no income taxes because their income would be less than the standard deduction.
All Senate Democrats voted for the tax cut, but some voiced reservations and said they’d prefer a different approach – restoration of the earned income tax credit. That credit targeted low-income taxpayers, who in some cases were eligible for a refund.
Sen. Andy Wells, a Hickory Republican, said he opposes the approach because the refund amounted to a “welfare check.” Democrats disagree.
“Our poorest families are continuing to struggle,” said Sen. Angela Bryant, a Rocky Mount Democrat. “We could, with a different policy, make a bigger impact for that poorest group.”
And Sen. Floyd McKissick, a Durham Democrat, said he thinks the state has the resources to offer both an earned income tax credit and a higher standard deduction. “So many of the tax cuts that have been made have gone to assist those that had high incomes,” he said.
Legislators aren’t considering further cuts to the overall income tax rate this year. Last year’s budget set the personal income tax rate to drop to 5.499 percent in 2017.
How much is the tax cut worth?
Projections show the change would mean that a married couple making about $44,000 a year would save $115 each year with the change.
The average savings at other income levels would be more modest: about $60 for families making between $10,000 and $30,000 per year and less than $10 for families making more than $200,000.
The impact is smaller at higher income levels because those taxpayers typically use itemized deductions – meaning they won’t see any change from a higher standard deduction.