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Tax Reform 2013
The First Step on the Path to Economic Growth and
Fiscal Stability in North Carolina
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Why Do We Need Tax Reform in
North Carolina?
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Despite being one of the “Best Business Climates” in the U.S. during the last decade according to Site Selection Magazine & other publications, in NC: Job creation is not keeping up with workforce growth Job growth, unemployment, & poverty is worse than
the U.S. average From 1990 to 2000, we were 11th in U.S.
wage and income growth; In 2009, North Carolina was 45th
In 2010, we were 48th
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A Surprising Statistic
Economic Success---and Failure
75
77
79
81
83
85
87
89
91
93
95
1969: 79.14
1973: 83.14
1982: 81.44
1989: 89.08
1997: 92.88
2009: 87.62
NC Per Capita Income as a % of US Average Has Been Decreasing Since 1997
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2011: 86.7
UNC Center for Competitive Economies
NC MEDIAN HOUSEHOLD INCOME HAS DECLINED EVERY YEAR SINCE 2000
Source: U.S. Census Bureau cited in Raleigh News & Observer Article in February, 2013
10.9 % DECLINE SINCE 2000
FY 03-04 FY 04-05 FY 05-06 FY 06-07 FY 07-08 FY 08-09 FY 09-10$0
$1,000,000,000
$2,000,000,000
$3,000,000,000
$4,000,000,000
$5,000,000,000
$6,000,000,000
$7,000,000,000
$203,437,950 $378,340,914
$1,616,170,002
$2,917,405,768
$4,180,679,410
$5,402,783,885
$6,725,966,540
NC Economic Development Spending (Cumulative)
Slide 6
Slide 7
NC Job Creation Performance 2000-2010
Job growth has lagged behind workforce growth for at least 12 years
1970 1980 1990 2000 2010
Manufacturing 35.2% 32.7% 25.5% 18.8% 10.8%
Government (incl. Military) 21.1% 19.6% 18.5% 18.1% 21.1%
Trade, Transportation and Utilities 18.5% 18.1% 19.6% 18.7% 17.8%
Services 14.9% 19.2% 25.2% 32.0% 39.1%
Financial Activities & Information 5.4% 5.5% 5.8% 6.5% 6.7%
Construction, Agriculture & Mining 5.0% 4.9% 5.4% 5.9% 4.5%
Shrinking Sales Tax Base• The sales tax base has narrowed significantly over 40 years
The bar graphs below indicate how North Carolinians spend $100 of their income as a % of items subject to sales tax
We spend a smaller % of our income on items subject to sales tax now than in the 1970’s & more on services not subject to sales tax
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Sales Tax Base Erosion
From Presentation by Economist Michael Mazerov to Senate Finance Committee in 2009 10
State Tax Structure
FY 1970-71 FY 2011-2012
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Overreliance on Unstable Income Taxes for State Revenues
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20% of General Fund revenue comes from these two volatile sources.
Why Tax Reform Was (Is) Needed• Pitiful job growth & increasing poverty in NC• Steadily decreasing per capita income and
median household income• Major changes in how NC economy functions• Steadily shrinking sales tax base• Increasing reliance on volatile income taxes• Increasing budget deficits• Unsuccessful economic incentive programs• Overly complex and confusing tax statutes
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Suggestions to Senate Finance Committee by Four Independent Experts on 6/11/13
• North Carolina’s current tax code is outdated and unsuitable for our changing economy
• Economic incentives have not produced jobs • Need lower income tax rates (especially
corporate) & broaden sales tax base to more services
• Reduce sales taxes on B2B transactions• Tax reform alone is not enough but is
necessary for job and income growth14
TAX SIMPLIFICATION AND REDUCTION STATUTES
House Bill 998, S.L. 2013-316 House Bill 112, S.L. 2013-363 House Bill 14, S.L. 2013-414
The Most Sweeping Changes to NC’s Tax Code in Many Years
Basic Components of Tax Law Changes
PITCIT
Sales
ElectricityPiped Gas
Estate Tax
Motor Fuel Tax Cap
Personal Income Tax• Flat rate v. current
rate brackets – 2013 = 6%, 7%, and
7.75% (Current rates)
– 2014 = 5.8%– 2015 and thereafter =
5.75%
• Enhanced child credit– $125 per child if AGI <
$40,000 (new)
– $100 per child if AGI < $100,000 (current law)
• Eliminate personal exemptions – One per taxpayer and
dependents – Current amounts:
• $2,000 • $2,500 if AGI <
$100,000
• Increase standard deduction to $15,000 (MFJ)– $6,000 (MJF) (Current
amount)
Personal Income Tax Changes – Itemized Deductions
• Currently, all federal itemized deductions allowed
• Effective 2014, only two deductionsHome mortgage + property taxes paid on real
estate allowed on federal return• Capped at $20,000
Charitable contributions allowed on federal return Other federal deductions eliminated
• Medical expense deduction• Unreimbursed employee expenses• Miscellaneous deductions• Personal property taxes
Items Eliminated
No fewer than 40 tax exemptions, deductions, credits, or refunds were eliminated or allowed to sunset as provided
Broadens the tax baseSimplifies the tax codeEases compliance and administration
Personal Income Tax Items that will Expire
• Credit for premiums paid on long-term care insurance
• Earned income tax credit• Credit for adoption related expenses
Personal Income Tax Items that were Repealed
• Personal exemptions• Tax Credits– Child care expenses– Disabled– Property taxes paid on farm machinery– Education expenses– Non-itemizer charitable contributions
Personal Income Tax Items that were Repealed
• Deductions from income– Retirement income– Severance wages– $50,000 business income deduction– Many itemized deductions– Parental savings trust fund – Firefighter & rescue squad– Payment for erroneous conviction
Corporate Income Tax Changes• Reduce flat rate of 6.9%– 2014 = 6%– 2015 = 5%
• Trigger for possible future rate reduction – 2016 = 5% or 4%– 2017 = 5% or 4% or 3%
• Triggers– FY14-15 GF revenues =/> $20.2 billion– FY15-16 GF revenues =/> $20.975 billion
Corporate Income Tax
Items that will Expire Items that were Repealed
• Credit for manufacturing cigarettes for exportation (2018)
• Deduction for certain telephone subscriber fees
• Deduction for savings & loan supervisory fees
Personal & Corporate Income TaxTax Credits that will Expire Tax Credits Repealed
• Ports charges• Recycling oyster shells• Renewable fuels• Work opportunity• Interactive digital media• Article 3J• Qualified business venture• Film (2015)• Renewable energy (2016)• Historic & mill rehab (2015)• Low income housing (2015)• Railroad intermodal (2038)
• Construction of dwelling units for handicapped
• Real property donations• Conservation tillage
equipment• Gleaned crops• Construction of poultry
composting facility
Tax Preferences Retained
• Personal Income Tax– Deduction for all social security income– Deduction for “Bailey” retirement income– Child credit – Standard deduction
• Corporate Income Tax– Credit for research and development (2016)– Credit for investing in a major recycling facility
(no change from current law)
SALES TAX CHANGES
• Rate changes• Additions to the sales tax base• Elimination of exemptions• Sales tax refunds• Various effective dates
Rates• No change in the State tax rate of 4.75%• No change in the local tax rates of 2% to 2.25%
(Mecklenburg rate of 2.5%)
• Manufactured homes– Currently 2% with $300 cap– State rate of 4.75%, effective January 1, 2014– No local tax
• Modular homes– Currently 2.5%– State rate of 4.75%, effective January 1, 2014– No local tax
Sales Tax Base Expansion
• Amusements – January 1, 2014– Live events– Movies– Attractions for which
admission charged• Exemptions– School events– Nonprofit events (2)– Agricultural fairs – Youth sporting events– State attractions
• Service contracts – January 1, 2014– Agreement by which seller
agrees to maintain or repair tangible personal property (TPP)
– Not labor
• Exemptions– TPP exempt from sales tax,
except motor vehicles– Items used to fulfill service
contract– Asset on utility owned property– TPP sold to motorsports for
which a sales tax refund is allowed (S.L. 2013-414)
Eliminate Sales Tax Exemptions
Repealed January 1, 2014 Repealed July 1, 2014• Nutritional supplements
sold by chiropractors• Meals sold in higher
educational facilities• Newspapers
• Bakery thrift store • Sales tax holiday for school• Sales tax holiday for certain
energy star products
Other Sales Tax Changes• Exemptions for farmers– Annual gross income requirement from farming
activity of $10,000– Effective July 1, 2014
• Tax refunds for nonprofits– Cap at $45 million State and local
(~ $666 million of purchases)
– Effective July 1, 2014• No change to tax refunds for local
governments• Extend sunsets for passenger air carriers &
motorsports for two years, January 1, 2016
ELECTRICITY & PIPED NATURAL GAS
Effective July 1, 2014
ElectricityCurrent Law Effective July 1, 2014
• 3.22% franchise tax– Embedded in electricity
rates– Subject to local
distribution• Sales tax – 3% residential– 2.83% for dry cleaners– 0% for manufacturers &
farmers & datacenters
• Eliminate franchise tax– Utilities Commission
directed to change rates accordingly
• Increase sales tax rate– State rate only– General combined rate
of 7%– Local distribution
formula– Retain current
exemptions
Piped Natural GasCurrent law Effective July 1, 2014
• Exempt from sales tax– Embedded in utility
rates– Subject to local
distribution• Excise tax on a per therm
basis• Exemptions for
manufacturers, farmers, and datacenters
• Eliminate excise tax– Utilities Commission
directed to change rates accordingly
• Subject to sales tax– State rate only– General combined rate
of 7%– Local distribution
formula– Retain current
exemptions
ESTATE TAX
• House Bill 101 eliminates estate tax• Effective for decedents dying on or after January
1, 2013• Reduces General Fund revenues by ~ $52 million
MOTOR FUEL TAX
Caps tax rate at 37.5 cents per gallonEffective October 1, 2013, through June 30, 2015House Bill 966; SCS for House Bill 998
What is the Price of Inaction?
• The long term costs of failure to continue with major, meaningful tax reform are obvious from the economic information presented—continued decrease in personal income, increasing poverty, budget deficits, unemployment, etc.
• Everyone agrees the current tax code is antiquated and simply not adequate for NC’s new economy---- it MUST be changed
Follow-up Questions-Comments-Suggestions
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