Details of House Tax Plan Unveiled; Changes are Less Significant than Senate Plan

The AP is reporting that the North Carolina House has made available to them details of tax reform legislation they are working on. Following are the main highlights of the plan:

• The personal income tax would change from the current multi-bracket structure ranging from 6% to 7.75% to a flat 5.9% next year. Standard deductions would increase to exempt the first $12k of family income, and the child credit would increase from $100 to $250 for most filers
• The corporate income tax would drop from 6.9% to 6.75% next year, with the apportionment formula used by multi-state companies narrowed to cover only sales after four years
• Lower the combined state/local sales tax from 6.75% (for most counties) to 6.65%, while expanding the sales tax base to some services; specifically to businesses that already collect sales taxes on a portion of their sales (i.e. car repair shops that already collect sales taxes on parts would also charge sales tax on labor, or hair salons that already collect sales taxes on the sale of hair-care products would also charge tax on haircuts, etc.). Also, current exemptions to the sales tax such as the exempting of groceries from the state portion of the sales tax (most groceries are only subject to the local 2% rate) and prescription drugs would remain.
• The franchise tax on corporations would be reduced

According to the details provided in the article, the House plan is much more tentative than the Senate plan. There are a number of similarities, but key differences include:

• The House plan leaves the personal income tax significantly higher than the Senate plan (5.9% vs. 4.5% – a 31 percent higher rate)
• The House plan doesnt’ lower the corporate income tax rate as much as the Senate (6.75% vs. 6.5%)
• The House plan doesn’t lower the sales tax as much as the Senate plan does (6.65% vs. 6.5%), and the House plan still leaves the majority of sales tax exemptions on the books – thus leaving in uneven treatment of household purchases and therefore distortions in their decision-making, while leaving the rate higher than it otherwise could be
• The House plan doesn’t eliminate business privilege taxes or the state death tax like the Senate plan does

I’d still like to see more details of the House plan to provide a more informed evaluation, but at first blush it seems like the House plan as far less bold and therefore would have less of a positive economic impact.

Moreover, according to the AP article, the House plan would slow the growth of revenue by a similar amount as the Senate plan. With the details available thus far, it would appear this is achieved because the House plan – while not cutting rates as much – also would apply the sales tax to a far narrower base than the Senate plan.

If any meaningful tax reform is to be accomplished this session, the Senate and the House will need to iron out these details in short order.