North Carolina would be one of a handful of states without a corporate income tax.
Senate Republicans introduced a package of tax cuts for individuals and businesses that would result in less money — billions of dollars less — flowing to North Carolina coffers.
The state’s corporate income tax would be phased out over five years, starting in 2024. Currently at 2.5%, North Carolina’s corporate income tax is the lowest in the nation among states that collect it. By 2028, North Carolina would join a handful of states without one.
The proposal also would lower the personal income tax rate from 5.25% to 4.99% beginning next year, while increasing the standard deduction. A married couple filing a joint return could claim a standard deduction of $25,500, up from $21,500. The standard deduction for a person filing as a head of household would increase from $16,125 to $19,125, and the deduction for a single filer would rise from $10,750 to $12,750.
The child deduction would increase by $500, bringing it to $3,000 for a family earning up to $40,000.
The income cap for claiming a child credit would be lifted from $120,000 to $140,000.
State revenue lost as a result of the personal income tax reductions would be about $1.4 billion in 2025; the corporate deduction would cost the state about $498 million, and a proposed cut to franchise taxes would cost $170 million.
Sen. Dan Blue of Raleigh, the chamber’s Democratic leader, said he was concerned about tax cuts so deep they would hinder the state from addressing urgent needs.
“If you’re talking about a tax cut of however many billions of dollars being taken out of current budgets, current revenue, that’s almost a 10% availability cut,” Blue said. “And that has long-range implications. We have great needs that weren’t met and a lot of the stuff that we’ve been able to do over the last year, we’ve done because of the aggressive funding by the federal government.”
North Carolina has a surplus of more than $5 billion, largely because the Republican-led legislature and Democratic Gov. Roy Cooper failed to agree on a comprehensive state budget for two years.
In recent years, the state has brought in more money than anticipated, said Sen. Paul Newton, a Cabarrus County Republican who presented the tax proposal at a news conference and Senate Finance Committee meeting Tuesday.
Even with the tax cuts, revenue surpluses are projected “as far as the eye can see” based on revenue growth of 3.5% to 4%, he said.
“We’re fine, and hopefully, we’re here three or four years from now – pick a number – giving you another tax cut package,” said Newton, a Senate Finance Committee chairman.
Senate Republicans have the first crack at crafting the legislature’s budget proposal this year, and Senate Democrats said they’ve been contributing ideas.
Senate Democrats had their own news conference Wednesday, largely to promote elements of Gov. Roy Cooper’s budget proposal:
- $8 million to help farmers improve water quality
- Funding for dam maintenance and landslide hazard mapping
- 1,500 new NC Pre-K seats beginning in 2022-23
- A pay plan for correctional and juvenile justice workers
- $11.6 million in re-entry programs to combat recidivism
Democrats had been pushing for a reinstatement of the Earned Income Tax Credit, available to people with low or moderate incomes. The state eliminated the EITC in 2014.
Republicans don’t like tax credits, Newton said during a Senate Finance Committee discussion of the tax proposal. “That said, we think we’re bringing amazing benefits to lower income through the child tax deduction, through raising the standard deduction. We’re removing another 200,000 North Carolinians from the tax rolls with our plan.”
The proposal would use $1 billion in American Rescue Plan money on grants to businesses that received a state or federal COVID-related loan.
Businesses would be eligible for grants equal to 7.5% of their COVID-related loans, maxing out at $18,750.
Senate Republicans rejected the House plan that would have given tax breaks to businesses that received PPP loans. Controversy over House Bill 334, which House Speaker Tim Moore promoted, cost Republican Rep. Julia Howard her position as senior chairman of the House Finance Committee after she objected to the bipartisan bill, The News & Observer reported. Senate Republicans essentially wrote over the House idea by replacing the language in that bill with their own tax package.
The advantage of the Senate plan is that it uses federal rather than state money, Newton said, and would help more businesses, including historically under-utilized businesses whose owners said they were shut out of PPP loan distributions.
The House bill included a provision that would have exempted the first $10,200 of unemployment benefits from state taxes. That’s also erased from the Senate tax package.
“We have always taxed unemployment income, and in this environment where we have employers begging for people to come back to work, it didn’t seem like a good time to deviate from our longstanding policy of taxing unemployment benefits,” Newton told the Finance Committee.
The Senate Finance committee discussed the bill, but did not vote on it.
Sen. Bill Rabon said the bill will eventually go a full vote of the Senate. If it stalls in the House or is vetoed, the package will be in the budget, said Rabon, who chairs both the Finance and the Rules Committee.
A spokesman from Cooper’s office criticized some of the proposed cuts.
“We have a once in a generation opportunity to invest in our schools, quality child care, small businesses, community colleges, transportation, housing and tax cuts for families who really need it,” Cooper spokesman Ford Porter said in a statement. “The last thing we need is more sweeping tax breaks for corporations and the wealthiest among us instead of investments in our hard working families and communities.”
Policy Watch intern Kyle Ingram contributed to this report.