2013 Tax Changes Cindy Avrette NC General Assembly, Research Division Tax and Finance Steering Committee NC Association of County Commissioners October 22, 2013

“CHANGE IS GONNA COME” Either as ad hoc changes or reform …

Change came …” UI Fund & Solvency Changes ◦ S.L (H4) ◦ S.L (H743) ◦ S.L (S420) Tax Simplification and Reduction ◦ S.L (H998) ◦ S.L ◦ S.L ◦ S.L

UNEMPLOYMENT INSURANCE TRUST FUND & SOLVENCY CHANGES House Bill 4, S.L House Bill 743, S.L Senate Bill 420, S.L

Issue of Trust Fund Solvency Trust Fund Loan Balance ◦ $2.5 billion (September 2012) ◦ $1.9 billion (September 2013) Interest Payments ◦ $83.9 million (September 2012, 2.94% interest) ◦ ~$59 million (September 2013, 2.58% interest) States with a Balance ◦ 18 states in 2013 v 20 states in 2012 $20.2 billion in 2013 v $26.5 billion in 2012 ◦ CA, NY, NC, OH, IN

Federal-State partnership ◦ Broad federal guidelines ◦ Each state designs its own program within those guidelines FUTA – Federal tax ◦ 6% on $7,000 wage base; possible credit of 5.4% ◦ Effective tax rate of 0.6%, or $42/employee SUTA – State tax ◦ Experience-rated Payment of Benefits ◦ SUTA taxes ◦ Federal advances (February 2009) 6

YearFUTA Credit Reduction Additional Amount per Employee Total FUTA tax per Employee %$21$ Debt Repayment – FUTA Tax

YearFUTA Credit Reduction Additional Amount per Employee Total FUTA tax per Employee %$21$ Legislative Changes

9 Funding Other Benefits Fund Changes Adjust Benefits Adjust Contributions Programmatic Changes Enhance Program Integrity ( ) Strengthen Re- employment Efforts ( )

FUND CHANGES Restrict use of moneys Accelerate moneys to payment of principal on debt

Unemployment Insurance Reserve Fund 20% surtax Imposed when UI Reserve Fund < $163,349 Rename the fund Formerly Employment Security Administration Fund Change trigger Base on amount in the UI Fund Suspended when UI Fund has balance of $1 billion or more Cap amount in Fund $50 million or amount paid in interest previous year Restrict use to benefits & interest payments Formerly used to fund local offices

ADJUST BENEFITS Calculation of benefits Duration of benefits Eligibility, participation, and qualifying requirements

Calculation of Benefits Weekly Benefit AmountDuration of Benefits WBA = 50% of claimant’s average weekly wage in the last two quarters of the base period ◦ Formerly 50% of high-quarter wages in base period ◦ Average difference ~ 66.4% Maximum amount set by statute at $350 ◦ Formerly 66 2/3% of average weekly wage ~ $535 ◦ ~21.7% of weekly claims checked > $350 Duration tied to the seasonally adjusted unemployment rate ◦ Unemployment >9%, 20 weeks ◦ Unemployment <5.5%, 12 weeks Determined twice a year Formerly 26 weeks ◦ UpJohn Institute reported that 43% of claimants exhausted their maximum eligibility of 26 weeks from

Adjust Eligibility Requirements Reduced work hours ◦ 50% unilateral and permanent reduction Formerly 20% Suitable work ◦ After 10 th week, any employment offering 120% of WBA is suitable Good cause of leaving work ◦ Eliminates all but two: domestic violence and military spouse relocation Substantial fault ◦ Eliminated

ADJUST CONTRIBUTIONS Formula-based rate system Increase minimum and maximum rates Change trigger for surtax Reserve requirements for governmental entities and EO

Private Employers Formula-based tax schedule ◦ Replaces current set of stepped tax schedules with an equation based on a reserve ratio Benefits ◦ Smoother movement between experience ratings ◦ Improves responsiveness of system to balance in the UI Trust Fund Increase minimum and maximum SUTA tax rates by 0.06% ◦ January 1, 2014 ◦ Minimum rate will increase from 0% to.06% ◦ All employers will pay surtax ◦ Maximum rate will increase from 5.7% to 5.76%

Reimbursable Employers Governmental entities, nonprofits, and Indian tribes have the option to reimburse the Trust Fund for benefits charged  Maintain a reserve = 1% of taxable wages ◦ Applicable to most nonprofits & Indian tribes ◦ Expanded to all nonprofits & governmental entities ◦ One-time cash flow expenditure for governmental entities  ~$135m from State and local governments  ~$67.5m for State government workers (~$40,8 GF)

TAX SIMPLIFICATION AND REDUCTION House Bill 998, S.L House Bill 112, S.L House Bill 14, S.L

HB 998, V2 Senate CS HB 998, V2 SB 677 SB 363 SB 394 SB 394,V2 H985 SCS HB998 CCS

HB 985 Blust HB 998 Lewis SB 394 Clodfelter Hartsell Sen. Rucho’s ideas discussions SCS H998, 6 th Edition PITEliminate top bracket Flat rate of 5.9%, broaden base some Flat rate of 5.95%, broaden base some Phased elimination, very broad base Flat rate of 5.4% to 5.25%, very broad base CITPhase down to 5.9% Phase down to 5.4% 5.9%, eliminate many credits Lower rate, eliminate most credits Lower rate to 2%, very broad base FRLower rates, include LLCs Lower rates Lower rates, include LLCs Lower rate, include LLCs New flat rate business privilege tax PNo change Eliminate SAmusemts Electricity Service Ks Installation Amusemts Electricity Service Ks Installation Broaden base Very broad base; eliminate preferential treatment Cap refunds, farm Y, Amusemts, Electricity,

TAX REFORM? All depends upon a person’s point of view

Tax History from Series of ad hoc tax changes ◦ 3 economic downturns ◦ 2 economic upturns History of erratic revenue collections ◦ 20% of GF revenues from two volatile sources ◦ Increased 25.8% in the late 1990s, fell 30.1% in early 2000s, rose 31.9% in mid-2000s, and fell 27% in late 2000s No less than 8 study committees ◦ Generally accepted “truths” ◦ Broaden tax bases, lower tax rates ◦ Antiquated tax code

Sound Tax Structure OBJECTIVESRECOMMENDATIONS Revenue stability Revenue sufficiency Simplicity Ease of compliance & administration Fairness/tax distribution Tax rates/economic competitiveness Economic neutrality Broaden tax bases Lower tax rates ◦ Eliminate exemptions ◦ Eliminate deductions ◦ Eliminate credits ◦ Eliminate refunds ◦ Expand franchise tax base to all business entities ◦ Expand sales tax base to services

S.L PITCIT/FranchiseSales StabilityNo change No significant base expansion Sufficiency$455 - $590 million reduction $218 to $374 million reduction $447 to $497 million expansion SimplicityLess preferences Repealed some exemptions Ease of compliance YesSomeNo Fairness/tax distribution Flat rate Credits & exemptions repealed No changeNo significant base expansion Tax ratesReduced Same Economic neutrality Rates reduced Base broad Rates reduced Credits repealed No significant base expansion

Projected Revenue (Consensus revenue first two years, growth in the out years uses 20-year average inflation and population growth) 20, , , , ,267.2 Total Tax Reform Changes (119.0) (455.8) (655.1) (634.5) (661.8) Repeal Estate Tax (52.0) (57.0) (60.0) (63.0) (66.0) Total Tax Reform (171.0) (512.8) (715.1) (697.5) (727.8) School Capital Building Fund Net Changes (86.6) (437.8) (644.6) (623.5) (649.8) Revised Revenue from Tax Reform plus elimination of School Capital Building Fund 20, , , , ,617.3 Revenue Sufficiency Primary purpose of a tax system is to generate sufficient revenues to fund government services to the extent legislated.

Basic Components of Tax Act PIT CIT Sales Electricity Piped Gas Estate Tax Motor Fuel Tax Cap

ESTATE TAX Effective for decedents dying on or after January 1, 2013 Reduces General Fund revenues by ~ $52 million House Bill 101, SCS for House Bill 998

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

PERSONAL AND CORPORATE INCOME Changes effective for the 2014 taxable year – April 15, 2015 returns

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

Personal Income Tax Items that will ExpireItems that were Repealed Credit for premiums paid on long-term care insurance Earned income tax credit Credit for adoption related expenses Personal exemptions Credits ◦ Child care expenses ◦ Disabled ◦ Property taxes paid on farm machinery ◦ Education expenses ◦ Non-itemizer charitable contributions Deductions ◦ Retirement income ◦ Severance wages ◦ $50,000 business deduction ◦ Many itemized deductions ◦ Parental savings trust fund ◦ Firefighter & rescue squad ◦ Payment for erroneous conviction

Personal & Corporate Income Tax Tax Credits that will ExpireTax Credits that were 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

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

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)

Personal Income Tax Changes Flat rate v. current rate brackets ◦ 2013 = 6%, 7%, and 7.75% ◦ 2014 = 5.8% ◦ 2015 and thereafter = 5.75% Child credit ◦ $125 per child if AGI < $40,000 ◦ $100 per child if AGI < $100,000 Eliminate personal exemptions ◦ One per taxpayer and dependents ◦ $2,000 ◦ $2,500 if AGI < $100,000 Increase Standard Deduction to $15,000 (MFJ) ◦ $6,000 (MJF)

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

Corporate Income Tax Rate Reduce flat rate of 6.9% ◦ 2014 = 6% ◦ 2015 = 5% Trigger for possible 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

SALES TAX Rate changes Additions to the sales tax base Elimination of exemptions Sales tax refunds

Rates No change in the State tax rate No change in the local tax rates 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; county distribution eliminated

State and Local 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 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 )

Eliminate Sales Tax Exemptions Increases State and Local Tax Base Repeal January 1, 2014Repeal 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

Other Sales Tax Changes AGI of $10,000 to qualify for farm sales tax exemption ◦ Effective July 1, 2014 Cap tax refunds for nonprofits at $45 million ◦ 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

ELECTRICITY & PIPED NATURAL GAS

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 ◦ Rates to be changed accordingly ◦ Formula for local distribution Increase sales tax rate ◦ State rate only ◦ General combined rate of 7% ◦ Local distribution ◦ Retain current exemptions

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 ◦ Rates to be changed accordingly ◦ Formula for local distribution Subject to sales tax ◦ State rate only ◦ General combined rate of 7% ◦ Local distribution ◦ Retain current exemptions