The debates over North Carolina’s immediate (and perhaps long-term) tax climate are over, at least until the next legislative session. The last few months showcased a tangle of wide-ranging tax reform proposals. The Conference Committee version of H998 was signed by Governor McCrory yesterday, and is available at: The bill has been promoted as a tax simplification and tax reduction measure, predominantly aimed at individual and corporate income taxes (though other taxes are addressed), and as an attempt to neutralize North Carolina tax climate disadvantages relative to its neighboring states. The bill is significantly less comprehensive and less complex than some of the competitor bills that were under consideration. In general, tax rates are reduced, but tax preferences are also reduced.

Here is a high-level summary of the bill's proposals and amendments to current tax law:

Individual Income Tax:

  • Income tax brackets eliminated; flat tax instituted.
  • Rate reduced to 5.8% for 2014, and to 5.75% for 2015.
  • Personal exemptions replaced with increased standard deductions.
  • Other adjustments (subtractions and additions) to income streamlined and simplified.
  • Many credits eliminated (relating to disabilities, donations, federal retirement benefits, child care/employment/education, and certain agribusiness).
  • Study recommended to analyze possible changes to low-income housing credit.
  • Gambling winnings more clearly taxed.

Corporate Income Tax:

  • Tax rate dropped to 6% for 2014 and 5% for 2015.
  • If 2016-17 budgetary targets are met, the rate would fall further (study recommended to analyze target formula implementation).
  • System of credits is largely left as-is (exception: interactive digital media credit is repealed), though note that many credits will sunset if not renewed (exception: R&D credit is extended through 2015).
  • The state’s watershed economic development incentives, found in Article 3J (e.g., jobs and investment credits), are scheduled to sunset at the end of this year; perhaps importantly, neighboring states will still retain their key incentives.
  • Study recommended to analyze possible changes to “net economic loss” deductions.

Sales and Use Tax:

  • NO comprehensive sales tax base expansion; narrow focus (though a study is recommended to analyze possible future taxation of more services).
  • Certain service agreements for the repair and maintenance of goods would become taxable (provisions are rather unclear, particularly for the auto industry).
  • Certain events admission sales would become taxable at full sales tax rate instead of lower privilege tax rates.
  • Expanded Department of Revenue tax dispute settlement authority to deal with liabilities related to implementation of new service agreement and admissions sales taxes.
  • Electricity and piped natural gas would become taxable at full sales tax rates, instead of lower power/fuel tax rates; interlocal tax distribution scheme would be substantially modified (though a study is recommended to analyze distribution of the new electricity and gas taxes).
  • Manufactured and modular homes would become taxable at full rates, without any cap, rather than at current preferential rates.
  • Agricultural exemptions moved into a dedicated code section, but basically retained.
  • Nutritional supplements, bakery bread, and newspaper sales exemptions are repealed.
  • Student meals exemption is repealed but largely reinstated through amendment to school meals exemption (would now cover charter and "regional" school meals).
  • Sales and use ("back to school") tax holidays are eliminated.
  • Annual nonprofit/hospital drug refunds are capped at $45MM.
  • Business-specific refund incentives for passenger air carriers and motorsports are extended through 2015.
  • Study recommended to analyze possible changes to the current 1%/$80 per article preferential tax rate for certain industries.

Estate Tax:

  • Repealed, retroactively to January 1, 2013.

Motor Fuel Tax:

  • Capped at 37.5 cents per gallon (for the period of October 1, 2013 to June 30, 2015).
  • Study recommended to analyze possible changes to preferential carrier fuel rates.

(Business) Franchise Tax:

  • No change; study recommended to analyze possible future changes to the calculation and remaining viability of this tax.

Privilege Tax:

  • See above discussion in "Sales and Use Tax" on admissions.
  • Study recommended to analyze possible other changes.