Governor Pat McCrory and leaders of the state House and Senate have come to a long-awaited agreement on what they say is fiscally responsible tax reform.
The plan would replace the state’s tiered personal income tax rate with a flat 5.8 percent in 2014, and the corporate tax rate would fall as well. The sales tax would be broadened only slightly.
Governor Pat McCrory announced the tax reform agreement before an appreciative crowd of mostly Republican lawmakers in the historic Old Capitol building. As he beamed at his legislative allies, the governor said it was a historic moment.
"This is the most comprehensive tax reform package in North Carolina history," said McCrory.
The plan would certainly change things. In 2014, North Carolinians would pay a flat 5.8 personal income tax rate, down from the current maximum of seven and three-quarters. It would fall another quarter of a point in 2015. And the proposal would gradually reduce the 6.9 percent corporate tax rate to 5 percent by 2015. Governor McCrory says those cuts will help lift the economy.
Our tax reform plan is not just a tax cut here and there, but meaningful tax reform, historic tax reform that will spur economic development, great jobs, and put more money into the pockets of hard working North Carolinians."
The plan also eliminates a number of economic incentives and loopholes. What it doesn’t do is broaden the sales tax base significantly, unlike a plan put forth by the Senate earlier this year. That plan would’ve had the sales tax apply to more goods and services. With less money coming into the state’s coffers, there will be fewer immediate funds for lawmakers to work with. Speaker of the House Thom Tillis says the plan would bring in about $500 million less in revenue through mid-2015.
"This has less to do with broadening the base of the sales tax this year than simplifying the current way that you account for personal income tax, there were a few categories where there was some base expansion but it’s largely more focused on simplification and removing some of the exemptions and exceptions," said Tillis.
Tillis and other Republicans say with lower taxes to pay, both residents and companies will have more money to spend, and the economy will flourish. It’s part of a Reagan-era laissez-faire economic theory. But both Tillis and Senate President Phil Berger say lawmakers will still have to work on broadening the sales tax base.
"I don’t think anybody here will say that what we have done is everything you could do in tax reform." said Berger. "What we’re saying is that we’ve made significant steps in the right direction to lower rates, to simplify the code, to make North Carolina more competitive for businesses, and make it more competitive for individuals."
Some economists agree that what the governor and legislative leaders are proposing isn’t complete tax reform.
"You’ve got a spoonful of sugar, and you’ve got medicine, but all we’ve done is the sugar so far." said Brent Lane, an economic strategist with the UNC Kenan Institute. He says no one should think that this tax plan is a magic bullet for the state’s economy:
"We try to attribute too much significance to decisions like this. Tax reform was necessary, this is a small step in that direction, some of the changes are positive in terms of their likely economic effect, but they’re not going to be a revolution."
Lane says that’s because good tax policy is only one of several things that create a good climate for both businesses and citizens. He says the immediate effect of this bill will be to reduce revenue, which means every decision legislators make regarding education and health care will be crucial. Lane does like the bill’s intent to end some targeted incentives and exemptions. But Democrats, including Representative Rick Glazier, say they’re very worried about the impact of having less money to pay for government services.
"It strikes me as sort of the worst of all worlds of the plans. And you can call it what you want, it isn’t reform, it’s a tax cut that’s going to hurt the state, and I don’t see any significant benefit from the theory," said Glazier.
House and Senate leaders say they plan to vote on the tax bill Tuesday and Wednesday.