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Tax Reform 2013 The First Step on the Path to Economic Growth and Fiscal Stability in North Carolina 0.

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Presentation on theme: "Tax Reform 2013 The First Step on the Path to Economic Growth and Fiscal Stability in North Carolina 0."— Presentation transcript:

1 Tax Reform 2013 The First Step on the Path to Economic Growth and Fiscal Stability in North Carolina 0

2 Why Do We Need Tax Reform in North Carolina? 1

3 Despite being one of the “Best Business Climates” in the U.S. during the last decade according to Site Selection Magazine & other publications, in NC:  Job creation is not keeping up with workforce growth  Job growth, unemployment, & poverty is worse than the U.S. average  From 1990 to 2000, we were 11 th in U.S. wage and income growth;  In 2009, North Carolina was 45 th  In 2010, we were 48 th 2 A Surprising Statistic

4 Economic Success---and Failure : 86.7 UNC Center for Competitive Economies

5 NC MEDIAN HOUSEHOLD INCOME HAS DECLINED EVERY YEAR SINCE 2000 Source: U.S. Census Bureau cited in Raleigh News & Observer Article in February, % DECLINE SINCE 2000

6 Slide 5

7 Slide 6 NC Job Creation Performance Job growth has lagged behind workforce growth for at least 12 years

8 Manufacturing35.2%32.7%25.5%18.8%10.8% Government (incl. Military)21.1%19.6%18.5%18.1%21.1% Trade, Transportation and Utilities18.5%18.1%19.6%18.7%17.8% Services14.9%19.2%25.2%32.0%39.1% Financial Activities & Information5.4%5.5%5.8%6.5%6.7% Construction, Agriculture & Mining5.0%4.9%5.4%5.9%4.5%

9 Shrinking Sales Tax Base The sales tax base has narrowed significantly over 40 years  The bar graphs below indicate how North Carolinians spend $100 of their income as a % of items subject to sales tax  We spend a smaller % of our income on items subject to sales tax now than in the 1970’s & more on services not subject to sales tax 8

10 Sales Tax Base Erosion From Presentation by Economist Michael Mazerov to Senate Finance Committee in

11 State Tax Structure FY FY

12 Overreliance on Unstable Income Taxes for State Revenues 11 20% of General Fund revenue comes from these two volatile sources.

13 Why Tax Reform Was (Is) Needed Pitiful job growth & increasing poverty in NC Steadily decreasing per capita income and median household income Major changes in how NC economy functions Steadily shrinking sales tax base Increasing reliance on volatile income taxes Increasing budget deficits Unsuccessful economic incentive programs Overly complex and confusing tax statutes 12

14 Suggestions to Senate Finance Committee by Four Independent Experts on 6/11/13 North Carolina’s current tax code is outdated and unsuitable for our changing economy Economic incentives have not produced jobs Need lower income tax rates (especially corporate) & broaden sales tax base to more services Reduce sales taxes on B2B transactions Tax reform alone is not enough but is necessary for job and income growth 13

15 TAX SIMPLIFICATION AND REDUCTION STATUTES  House Bill 998, S.L  House Bill 112, S.L  House Bill 14, S.L The Most Sweeping Changes to NC’s Tax Code in Many Years

16 Basic Components of Tax Law Changes PIT CIT Sales Electricity Piped Gas Estate Tax Motor Fuel Tax Cap

17 Personal Income Tax Flat rate v. current rate brackets – 2013 = 6%, 7%, and 7.75% (Current rates) – 2014 = 5.8% – 2015 and thereafter = 5.75% Enhanced child credit – $125 per child if AGI < $40,000 (new) – $100 per child if AGI < $100,000 (current law) Eliminate personal exemptions – One per taxpayer and dependents – Current amounts: $2,000 $2,500 if AGI < $100,000 Increase standard deduction to $15,000 (MFJ) – $6,000 (MJF) (Current amount)

18 Personal Income Tax Changes – Itemized Deductions Currently, all federal itemized deductions allowed Effective 2014, only two deductions Home mortgage + property taxes paid on real estate allowed on federal return Capped at $20,000 Charitable contributions allowed on federal return  Other federal deductions eliminated Medical expense deduction Unreimbursed employee expenses Miscellaneous deductions Personal property taxes

19 Items Eliminated No fewer than 40 tax exemptions, deductions, credits, or refunds were eliminated or allowed to sunset as provided Broadens the tax base Simplifies the tax code Eases compliance and administration

20 Personal Income Tax Items that will Expire Credit for premiums paid on long-term care insurance Earned income tax credit Credit for adoption related expenses

21 Personal Income Tax Items that were Repealed Personal exemptions Tax Credits – Child care expenses – Disabled – Property taxes paid on farm machinery – Education expenses – Non-itemizer charitable contributions

22 Personal Income Tax Items that were Repealed Deductions from income – Retirement income – Severance wages – $50,000 business income deduction – Many itemized deductions – Parental savings trust fund – Firefighter & rescue squad – Payment for erroneous conviction

23 Corporate Income Tax Changes Reduce flat rate of 6.9% – 2014 = 6% – 2015 = 5% Trigger for possible future rate reduction – 2016 = 5% or 4% – 2017 = 5% or 4% or 3% Triggers – FY14-15 GF revenues =/> $20.2 billion – FY15-16 GF revenues =/> $ billion

24 Corporate Income Tax Items that will Expire Items that were Repealed Credit for manufacturing cigarettes for exportation (2018) Deduction for certain telephone subscriber fees Deduction for savings & loan supervisory fees

25 Personal & Corporate Income Tax Tax Credits that will Expire Tax Credits Repealed Ports charges Recycling oyster shells Renewable fuels Work opportunity Interactive digital media Article 3J Qualified business venture Film (2015) Renewable energy (2016) Historic & mill rehab (2015) Low income housing (2015) Railroad intermodal (2038) Construction of dwelling units for handicapped Real property donations Conservation tillage equipment Gleaned crops Construction of poultry composting facility

26 Tax Preferences Retained Personal Income Tax – Deduction for all social security income – Deduction for “Bailey” retirement income – Child credit – Standard deduction Corporate Income Tax – Credit for research and development (2016) – Credit for investing in a major recycling facility (no change from current law)

27 SALES TAX CHANGES Rate changes Additions to the sales tax base Elimination of exemptions Sales tax refunds Various effective dates

28 Rates No change in the State tax rate of 4.75% No change in the local tax rates of 2% to 2.25% (Mecklenburg rate of 2.5%) Manufactured homes – Currently 2% with $300 cap – State rate of 4.75%, effective January 1, 2014 – No local tax Modular homes – Currently 2.5% – State rate of 4.75%, effective January 1, 2014 – No local tax

29 Sales Tax Base Expansion Amusements Amusements – January 1, 2014 – Live events – Movies – Attractions for which admission charged Exemptions – School events – Nonprofit events (2) – Agricultural fairs – Youth sporting events – State attractions Service contracts Service contracts – January 1, 2014 – Agreement by which seller agrees to maintain or repair tangible personal property (TPP) – Not labor Exemptions – TPP exempt from sales tax, except motor vehicles – Items used to fulfill service contract – Asset on utility owned property – TPP sold to motorsports for which a sales tax refund is allowed (S.L )

30 Eliminate Sales Tax Exemptions Repealed January 1, 2014Repealed July 1, 2014 Nutritional supplements sold by chiropractors Meals sold in higher educational facilities Newspapers Bakery thrift store Sales tax holiday for school Sales tax holiday for certain energy star products

31 Other Sales Tax Changes Exemptions for farmers – Annual gross income requirement from farming activity of $10,000 – Effective July 1, 2014 Tax refunds for nonprofits – Cap at $45 million State and local (~ $666 million of purchases) – Effective July 1, 2014 No change to tax refunds for local governments Extend sunsets for passenger air carriers & motorsports for two years, January 1, 2016

32 ELECTRICITY & PIPED NATURAL GAS Effective July 1, 2014

33 Electricity Current LawEffective July 1, % franchise tax – Embedded in electricity rates – Subject to local distribution Sales tax – 3% residential – 2.83% for dry cleaners – 0% for manufacturers & farmers & datacenters Eliminate franchise tax – Utilities Commission directed to change rates accordingly Increase sales tax rate – State rate only – General combined rate of 7% – Local distribution formula – Retain current exemptions

34 Piped Natural Gas Current lawEffective July 1, 2014 Exempt from sales tax – Embedded in utility rates – Subject to local distribution Excise tax on a per therm basis Exemptions for manufacturers, farmers, and datacenters Eliminate excise tax – Utilities Commission directed to change rates accordingly Subject to sales tax – State rate only – General combined rate of 7% – Local distribution formula – Retain current exemptions

35 ESTATE TAX House Bill 101 eliminates estate tax Effective for decedents dying on or after January 1, 2013 Reduces General Fund revenues by ~ $52 million

36 MOTOR FUEL TAX Caps tax rate at 37.5 cents per gallon Effective October 1, 2013, through June 30, 2015 House Bill 966; SCS for House Bill 998

37 What is the Price of Inaction? The long term costs of failure to continue with major, meaningful tax reform are obvious from the economic information presented—continued decrease in personal income, increasing poverty, budget deficits, unemployment, etc. Everyone agrees the current tax code is antiquated and simply not adequate for NC’s new economy---- it MUST be changed

38 Follow-up Questions-Comments-Suggestions


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