SENATE BILL 394

Lower Tax Rates for a Stronger NC Economy

Bipartisan Plan for Economic Growth

• Lower every major tax rate

• Make tax rates more competitive with neighboring

states

• Make tax system simpler, fairer

• Eliminate clutter of rates, exemptions

• Provide stable revenue stream

• Disentangle State revenue from local revenue

• Keep changes revenue-neutral

SO WHAT’S WRONG WITH THE REVENUE

SYSTEM WE HAVE NOW?

MAINE SUNDAY TELEGRAM

SUNDAY, JULY 26, 2009

North Carolina Tax Structure (1970 – 2013)

24.1% 18.5% 14.7%

10.2% 10.7% 9.6% 9.9%

31.0%

25.9% 25.1%

27.3% 27.9% 31.9% 28.8%

12.2%

9.8%

7.4% 3.7% 5.0%

5.5% 5.7%

32.7%

45.8% 52.8%

58.8% 56.4% 53.0% 55.6%

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

70.0%

80.0%

90.0%

100.0%

1970-71 1980-81 1990-91 2000-01 2008-09 2010-11 2012-13(projected)

Personal Income

Corporate

Sales

Other

Growth & Stability

25.8%

-30.1%

31.9%

-27.0%

-40%

-20%

0%

20%

40%

1997-98 2000-01 2003-04 2006-07

Corporate Income Tax

Non-withholding PIT

Sales Tax

Withholding PIT

5

20% of General Fund revenue comes from two volatile sources: CIT &

non-withholding portion of the PIT

Sales Tax Base Is Shrinking as Percentage of Total Economy

38

40

42

44

46

48

50

52

54

79 84 89 94 99 04

Pe

rce

nt

The Sales Tax Base

56.1%52.7%

46.2%

36.8%

0%

10%

20%

30%

40%

50%

60%

70%

1970s 1980s 1990s 2000s

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

4.0%

4.5%

5.0%

Due to shifts in consumption and an eroded base,

the State rate has increased from 3% to 4.75%.

Despite the rate increase, sales tax as a share of

GF revenue has declined.

Taxation of Services, by State

0

20

40

60

80

100

120

140

160

180

OR

AK

NH

CO IL

MA

MT

NV

VA

CA IN

ME MI

MO

ND

KY ID RI

NC

OK

VT

SC

GA

AL

MD

AZ

LA

PA

NY

UT

WY

FL

MN

TN

OH

AR

MS

KS NJ

WI

NE

CT

TX IA

WV

DE

SD

NM

WA HI

NC

Source: Federation of Tax Administrators, 2007 Survey

Tax Rates

Tax Current Rate SB 394 Rate Decrease

Individual Income 6, 7, & 7.75% 6% 23%

Corporate Income 6.90% 6% 13%

Franchise $1.50/1000 $1.25/1000 16.70%

State Sales 4.75% 4.50% 5%

Rates Compared to Other States

Tax Current SB 394 GA SC TN VA

Individual Income

6, 7, & 7.75

6 1 to 6 3 to 7 No general 2 to 5.75

Corporate Income

6.9 6 6 5 6.5 6

Franchise 1.50/1000 1.25/1000 $10 to 5000

1.00/1000 2.50/1000 No general

State Sales 4.75 4.5 4 6 7 4

Individual Income Tax Highlights

• Establishes flat 6% rate

• Replaces standard deduction and exemptions with zero

bracket amount

• Eliminates all credits except:

• Child credit – increased to $200 or $450

• Charitable contribution credit, capped at $600

• Replaces other credits and deductions with personal

expense credit available to everyone

• Eliminates most deductions

• Taxes Social Security income only if taxed by federal

government

Business Tax Highlights

• Lowers corporate tax rate to 6% - same as individual rate

• Increases sales factor weighting from 2x to 6x – first step

in transition to single factor sales

• Includes all limited liability entities in business privilege

tax – replacement for franchise tax

• Repeals local privilege license taxes

• Repeals $1%, $80 excise tax on manufacturers and a few

other businesses and enacts sales tax exemption for the

capital equipment that was subject to that tax

• Allows Article 3J and most tax credits to sunset

• Eliminates annual report fees

Sales Tax Changes: Expand Base • Repeal vending and various other exemptions

• Include tangible personal property services

• Service contracts

• Alteration, repair, maintenance, cleaning, and installation

• Include entertainment and recreation

• Live entertainment, movies formerly taxed under privilege license tax

• Charges for museums, cultural sites, exhibits, shows, similar attractions

• Charges to play or participate in a game, sport, or fitness activity

• Include storage

• Short-term self-rental space, short-term clothing, boat, aircraft storage

• Include real property care and maintenance services

• Extermination and pest control services

• Landscaping services other than for new construction, utility easement

• Cleaning

• Include security services

• Guard and armored car services, alarm system monitoring

• Locksmith services, telematic motor vehicle services

Local Revenue Impacts Increases

• Distribution of State

business privilege tax

• Expand sales tax base:

• Electricity and piped gas

• Tangible personal property

services

• Entertainment, recreation

• Real property care and

maintenance services

• Eliminate exemptions

Decreases

• Local privilege license tax

• Distributions of State tax:

• Franchise tax on electricity

• Piped gas excise tax

• Beer and wine excise tax

• Corporate income tax

• Modular home sales tax

• Medicaid hold-harmless

• 1% Sales Tax on Food