For several months, the North Carolina Senate and House have considered competing tax reform proposals. On Monday, June 10, the House passed HB 998 on its third reading and sent it to the Senate for consideration. On Tuesday, June 11, the Senate rolled out its version of tax reform in a proposed committee substitute for HB 998. On June 12, the Senate Finance Committee gave a favorable report for the proposed committee substitute. It is expected that the Senate's version will pass the Senate this week and be sent to a Senate/House conference committee.

The Senate's proposed committee substitute signaled a significant departure from SB 677, sponsored by Senators Rucho and Rabon, co-chairs of the Senate Finance Committee. They had proposed a sweeping expansion of the sales tax base by expanding the sales tax to approximately 120 services. A large majority of those services are not now subject to sales tax in North Carolina.

Particularly noteworthy differences between HB 998 as passed by the House and the Senate’s June 11 proposal include:

  • HB 998 would phase in a reduction of the corporate income tax rate to 5.4% by 2018. The Senate proposal would phase in an elimination of the corporate income tax by 2017.
  • The Senate proposal includes a new business privilege tax, with a flat tax amount of $400 in 2015, $600 in 2016, and $750 after 2016 for all limited liability entities except C corporations. The franchise tax would be applied only to C corporations, with a phase-out through 2017. Thereafter, C corporations would be subject to the new business privilege tax and would pay a flat tax of $5000 starting in 2018.
  • HB 998 would lower the general franchise tax rate to $1.35 per $1000, whereas the Senate proposal would phase in an elimination of the franchise tax by 2018.
  • The Senate proposal would eliminate various sales tax exemptions that HB 998 does not address.
  • The Senate proposal would reduce the individual income tax rate to a flat rate of 5.4% in 2014 and 5.25% in 2015 and thereafter. This tax rate would be applied to North Carolina income in excess of a zero tax bracket ($15,000 for married, filing jointly (“MFJ”)). HB 998 would reduce the individual income tax rate to a flat rate of 5.9%.  A standard deduction would be allowed ($12,000 for MFJ), and most itemized deductions would be eliminated with two major exceptions.  Unlimited charitable deductions would be allowed. Home mortgage interest and taxes paid on real estate would be deductible, subject to a combined cap ($25,000 for MFJ).

Legislative staff has prepared a more detailed comparison of HB 998 and the Senate proposed committee substitute.

Both Senate and House are working hard to pass tax reform and the State's biennial budget so that they can adjourn, perhaps as early as the end of June.