On July 23, The North Carolina Tax Simplification and Reduction Act (HB 998) was signed into law by Governor Pat McCrory. The Conference Committee Substitute was approved by the North Carolina House of Representatives and the Senate on July 17.
While the final tax legislation was not as revolutionary as earlier proposals, the changes in the individual and corporate income tax rates are significant. The following is a summary of the pertinent provisions of the law and the effective dates.
Summary of Provisions of HB 998:
Individual Income Tax:
- Replaces the current three graduated rates of 6%, 7% and 7.75% with a flat rate of 5.8% in 2014 and 5.75% in 2015 and thereafter.
Eliminates personal exemptions and deductions, except:
- Allows unlimited deductions for charitable contributions.
- Caps the combined mortgage interest and property tax deductions at $20,000 for all filers.
Increases the standard deduction-currently ranging from $3,000 to $6,000-to the new range of $7,500 to $15,000:
- $15,000 for married taxpayers filing jointly.
- $12,000 for head-of-household filers.
- $7,500 for single and married taxpayers filing separately.
- Eliminates a deduction of $4,000 on government retirement income and $2,000 on private retirement income. Retirees’ income from private plans or government pensions would now be subject to the income tax, except for certain retirees and vested employees whose pensions are protected by the 20-year-old court settlement known as the Bailey case.
- Raises the child tax credit from $100 per child to $125 for tax filers earning below $40,000. The credit would be eliminated for people earning more than $100,000, and would stay at $100 per child for those earning between $40,000 and $100,000.
- The income tax changes summarized above are effective for tax years beginning on and after January 1, 2014.
Corporate Income Tax:
- Corporate income tax rate will drop from 6.9% to 6% in 2014 and 5% in 2015, with further reductions to 4% in 2016 and 3% in 2017 if the state meets certain revenue targets for the 2014-2015 and 2015-2016 fiscal years.
- Eliminates the $50,000 deduction on certain small-business-related income approved in 2011.
Effective Jan. 1, 2014:
- The state sales tax rate remains at 4.75%; local rate remains at 2%, plus a local option 0.25%.
- Tax base expanded to include service contracts for items already subject to the tax.
- Does not apply to alterations, repairs, maintenance or installation of goods.
- Tax manufactured homes (now 2% or $300 maximum) and modular homes (2.5%) will be subject to tax at a full 4.75% state sales tax rate.
- Repeals exemptions for chiropractors’ nutritional supplements and newspaper sales.
- Extends the state sales tax to certain service contracts and entertainment and entry tickets to certain attractions.
Effective July 1, 2014:
- Repeals the current 3% franchise tax on electricity sales, replacing it with a 7% combined state and local sales tax rate.
- Makes piped natural gas subject to a combined rate of 7%, and ends excise tax.
- Repeals the sales tax holiday weekend in August and Energy Star appliance sales tax holiday weekend in November.
- Caps sales tax refunds for nonprofit hospitals, universities and other charities at $45 million annually ($31.7 million state, $13.3 million local) for each institution.
Other Tax Changes:
- Eliminates the North Carolina estate tax, historically designed to absorb the federal death tax credit (now repealed by federal law), effective for estates of decedents dying on and after January 1, 2013.
- Cuts and caps the gas tax at 37.5 cents per gallon effective October 1, 2013 through June 30, 2015.
- Eliminates some tax preferences, while extending others that were set to expire and keeping many unchanged.
- Keeps the Low Income Housing Tax Credit in place, but allows it to expire in 2015.
- Makes no changes to the corporate franchise tax, but requires a study on the issue.
The Fiscal Note for the Bill indicates that the plan will reduce collections by $87 million in 2013-14, $438 million in 2014-15, and more than $600 million per year after that. Local governments would receive an estimated $14.6 million in additional revenue in 2013-14 and $36.2 million in 2014-15.