Sweeping changes will follow lawmakers' work on taxes

Jul. 17, 2013 @ 07:34 PM

RALEIGH — North Carolina residents will see sweeping changes to their taxes after the legislature gave final approval Wednesday to a plan that lowers income tax rates, repeals the estate tax and tinkers with the sales tax. Gov. Pat McCrory is expected to sign it to become law.

The deal, announced earlier this week after months of discussions and recent intense negotiations, was approved mostly along party lines. Democrats called the proposal a tax increase in disguise for most citizens at the expense of the wealthy and corporations.

But Republicans who wrote the bill dismissed the concerns of political rivals, saying the plan would result in more money for people at various income levels and would make North Carolina more competitive with other states in recruiting business.

"It's every Republican's dream that they can cut taxes," Rep. David Lewis, R-Harnett and a chief negotiator on the tax plan said before the House approved the measure 77-36. "And this bill does do that."

Republicans were proud to approve the measure, since legislative leaders and McCrory had pledged months ago to get a tax overhaul passed this year and believe it's a significant step toward what they call "tax reform" that previous elected officials has failed to accomplish.

"This is what we were sent here to do," said Rep. Bert Jones, R-Rockingham. Democrats say the bill isn't reform but only a tax shift.

The Senate voted for the measure 32-17 a couple of hours after the House did. Once McCrory signs the bill — his office didn't say when Wednesday— most changes will take place in January 2014 and July 2014, although the estate tax repeal begins this year.

The broadest changes are with income taxes.

The bill would reduce the state's three personal income tax brackets — the highest rate at 7.75 percent — into one flat rate of 5.8 percent in 2014 and 5.75 percent in 2015. The corporate income tax rate of 6.9 percent would fall to 6 percent next year and 5 percent in 2015. The corporate rate could fall further in 2016 or 2017 if the state meets revenue goals.

Sen. Tom Apodaca, R-Henderson, said Wednesday that Commerce Secretary Sharon Decker told him and colleagues that he received three calls Tuesday from company executives saying they want to build in North Carolina because of the tax package.

"What we did was the right thing, and it is already bearing fruit," he said.

Democrats say any fruits will be sour because the package will result in higher taxes for small business owners and low- and middle-class taxpayers, citing documents from advocates for the poor and the General Assembly's non-partisan staff. A $50,000 maximum individual tax deduction for business-related income approved just two years ago would be repealed.

Sixty percent of individual income tax returns with business income and qualified for the deduction would see an average tax increase of $1,190, according to the legislature's Fiscal Research Division, using an outside statistical model.

"I want to help the small businesses who are the bread and butter of our communities," said Sen. Gene McLaurin, D-Richmond, who voted against the bill. "I'd support a fair and balanced tax plan." Three House Democrats voted for the final plan: Reps. Bill Brisson of Bladen County, Paul Tine of Dare County and Ken Waddell of Columbus County.

Republicans offered their own scenarios showing tax filers from $20,000 to $250,000 getting a tax reduction under the plan.

The tax overhaul package would result in $524 million less in combined revenue through mid-2015 compared to if no tax changes were made, with the amount expanding to more than $600 million annually in the following years, according to General Assembly staff projections.

The bill also would:

— eliminate personal exemptions but increase standard deductions for individual income tax filers.

— raise the $100-per-child tax credit for low-income families to $125.

— subject the combined state and local 6.75 percent sales tax to service contracts and extended warranties.

— cap the state gasoline tax at 37.5 cents per gallon through June 2015.

— repeal starting in 2014 sales tax holiday weekends in August for school supplies, computers and clothing and for Energy Star appliances in November.