The North Carolina Senate and House ramped up their battle last week over the future of House Bill 998, also known as the Tax Simplification and Reduction Act.
The N.C. Senate spent almost 10 hours in session last week trying to make a decision on where to go next with the latest tax bill.
House Bill 998 has been revised several times since it was first introduced on Monday April 17, including changes in tax deductions, personal and corporate income tax rates, and various goods affected by the sales tax.
On Wednesday, June 12, the House adopted further changes to the bill proposed by the Senate that would affect everyone in the state of North Carolina. Some of the changes include major revisions to personal and corporate income taxes.
Under the latest revision, North Carolina’s personal income tax rate would be capped at 5.4 percent as opposed to the current 7.75 percent rate. Additionally, married individuals earning less than $15,000 and single individuals earning less than $7,500 would be exempt from paying income tax.
Additional changes to the bill include reducing corporate income tax to 2 percent by 2016 to promote business and job growth in North Carolina
Other changes would expand sales taxes to include entertainment goods such as movie tickets and restaurant meals while also increasing taxes on electricity.
According to the Tax Foundation, North Carolina currently has the highest tax rate in the Southeast. Additionally, North Carolina also ranks 44 out of 50 on the Business Tax Climate Index, making it one of the 10 worst states for a business-friendly competitive tax climate.
Experts in North Carolina, such as N.C. State economics professor Michael Walden, discussed the bill’s impact on the state’s economic growth.
“The ‘economic jury’ is out on what these kinds of changes [as a result of House Bill 998] will mean for economic growth and jobs,” Walden said. “My conclusion is that any impacts solely from the tax changes will be modest.”
Walden said the state economy is improving, adding more than 200,000 jobs over the last three years and 90,000 last year alone.
“Our job growth rate and other economic indicators are actually improving at a slightly faster rate than in the nation,” Walden said. “Still, we need more progress, which I predict will happen.”
Roby Sawyers. an accounting professor and tax specialist at N.C. State, said the potential effects of House Bill 998 would vary depending on students’ individual situations.
“If you pay income tax, it will reduce your income tax,” Sawyers said. “However, if you don’t pay income tax now, then you aren’t going to pay it in the future. If we tax more services like haircuts, your tax liability might go up. Currently, the House bill does not include these services for taxation.”
Sawyers said that, in theory, the changes could spur job growth.
“The idea is that you are giving the businesses more money to reinvest instead of paying the government,” Sawyers said. “If you reinvest in your company, you hire more people, get more equipment, and this results in economic growth.”
An expanded sales tax would also benefit local governments.
“(The) only thing that affects local tax is sales tax,” Sawyers said. “Personal and corporate income tax would not affect local tax, but broadening the sales tax to include more services would be good for local governments since they would get more revenue.”
Walden said taxes weren’t the most important factor affecting a state’s economic growth. He said the bills that have come out of the House and Senate would make modest changes to the structure of our tax system, but not major, bold changes – rates would go down, the base would get a bit more broad, and most would see a reduction in their state taxes.
For now, though, it is uncertain if the bill will get passed and in what form.
“We have a House bill and we have a Senate bill, and we might see something that they decide on, or [they may] stick with the status quo, but hopefully not the latter,” Sawyers said.
