A new year also brings a new tax structure in North Carolina.
The state could lose about $700 million a year due to a cut in income tax rates, but that is expected to be made up by expanded sales and use taxes.
N.C. Sen. Shirley Randleman, a Wilkes County Republican who represents Surry County, said all changes are part of a plan which began when the Republicans took control of the N.C. General Assembly in 2011.
“When we took over, we faced a $2.5 billion budget shortfall and had a $2.8 billion debt to the federal government,” said Randleman. “In 2011, income tax collections also dropped by 40 percent from the year before.”
Randleman said it became apparent a reliance on income taxes didn’t create the stability needed to appropriately fund the government. In 2011, the legislature cut everything it could to balance the budget, and then it began implementing a revenue-neutral plan to use a more reliable source of revenue to pay for services: sales and use taxes.
“We were looking for a predictable stream of revenue,” said N.C. Rep. Sarah Stevens, a Mount Airy attorney.
Income taxes
The personal income tax rate in North Carolina dropped from 5.75 percent to 5.499 percent when the ball dropped on Jan. 1.
One publication estimated that the drop will cost the state coffers $700 million.
“It gets money back into the pockets of those earning it,” said Randleman, who also noted the standard deduction for income tax returns had been increased.
Randleman said she would like to see the personal income tax rate continue to drop lower. However, leaders must first see how the latest changes shake out — that is how this and other moves ultimately affect revenues.
Stevens said the House of Representatives is likely to take the same stance on any future reductions, opting to wait and see before slashing rates any further.
The corporate income tax rate in the state is also lower in 2017, having been reduced from 4 percent to 3 percent.
According to the Tax Foundation, North Carolina now has the lowest corporate income tax rate in the country, excluding the six states which do not levy such a tax. Iowa has the highest rate at 12 percent.
Randleman said she believes some of her colleagues might like to see the corporate tax further lowered, a plan to which she’s not necessarily opposed. However, she plans to prioritize reductions.
“We need to concentrate on the personal income tax first,” said Randleman. “That puts money back in the pockets of the people.”
Sales tax expansion
Legislators expect any budget shortfalls which would have resulted from the income tax reductions to be covered by an expansion of the sales tax base.
A notice from the N.C. Department of Revenue indicates on Jan. 1 the state began collecting sales tax on additional services.
“The sales price or gross receipts from repair, maintenance, or installation services performed to real property are subject to sales or use tax,” reads the notice.
Additionally, some service contracts for monitoring or inspecting property are also now taxable, according to the notice.
Stevens said the changes are clarifications, making those who do work in those fields aware they are to tax for both goods and services.
A large expansion of the tax base took place in March of 2016. More than 40 services, including auto repairs, plumbing services and clothing alterations, were added to what is taxable in the state.
Some believe the new tax structure, which relies more heavily on sales and use taxes, requires those who arr poorer to shoulder more of the weight associated with funding governmental operations.
“I’m just a little concerned about expanding the sales tax, especially down in rural areas,” said Rep. Ken Waddell, a Columbus County Democrat, when interviewed by the Raleigh News & Observer regarding the tax changes. “It’s going to cause a lot of heartburn when they don’t have a lot of money to spend in the first place.”
The income tax cut amounts to a tax cut of about $36 for a family making $30,000, as the first $15,500 of a family’s income is not taxed. However, a car or other repair of $550 will cost the family $37 in sales tax as a result of the expansion of the sales tax base.
Randleman and Stevens, however, described the shift to a higher reliance on sales and use tax as the fairest way to tax the residents of North Carolina.
“It’s fairer across the board,” said Randleman.
The senator said the heavier reliance on sales tax allows all North Carolina residents to share in the burden of running the government and providing services. In the past, those who work and own property have footed the vast majority of the bill for government services.
“It allows others to share in part of the expense,” added Randleman.
Stevens provided a similar answer.
“How much more of an equitable tax could you have?” asked Stevens. “Everybody pays the tax, and everybody pays the same percentage.”