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The ongoing recession, the expiration of two temporary taxes, and the end of federal recovery aid have left North Carolina with a $2.4 billion gap for next fiscal year.  The state’s Democratic governor, Bev Perdue, and the Republican-led legislature have taken very different approaches to plugging the gap. 

Governor Perdue’s budget plan, released earlier in the spring, balanced spending reductions (around $1.4 billion) with about $1 billion of additional revenue.  The primary means for raising revenue in her budget included extending three fourths of a temporary sales tax increase enacted in 2009 and set to expire this summer.  She also proposed reducing the state’s corporate income tax rate from 6.9 percent to 4.9 percent, a move Republican leaders have, surprisingly, not yet embraced.
Republican House and Senate leaders have adamantly opposed extending either the temporary sales tax or personal income tax surcharge, taking a cuts-only approach to the state’s fiscal problems.  In fact, they have proposed new tax cuts that would force them to reduce state spending beyond the $2.4 billion budget gap and far beyond the governor’s proposal.
The North Carolina Senate released its budget plan this week.  It includes around $550 million in tax cuts, once it’s fully phased-in, resulting in deeper cuts to education, public safety, and health care. 

Billed as a ‘Jobs Package’, it would cut personal income tax rates by 0.25 percentage points in each bracket and exempt the first $50,000 of small business income from the personal income tax for businesses with gross receipts under $850,000, at a cost of around $485 million.  The Senate would also eliminate the state’s estate tax for an additional loss of $72 million. 

The plan raises small amounts of revenue by eliminating a handful of random state tax expenditures such as the credit for oyster recycling and the sales tax holiday for Energy Star appliances. 

The House GOP’s budget plan, released earlier in the month, was short on tax package details other than sticking to the promise to allow the temporary taxes to expire.  However, rumors are swirling that their plan will be released soon and will likely closely mirror the Senate’s proposal. 

If these rumors are true, their plan would not only cut taxes for wealthy taxpayer and businesses, but would also increase taxes on working families by eliminating the state’s Earned Income Tax, Child Tax, and Child and Dependent Care credits.

House and Senate GOP leaders had made veiled promises to reform the state’s outdated and inadequate tax code this year.  Both hinted they would start by broadening the personal income tax base, moving from federal taxable income to federal adjusted gross income (AGI).  This move would eliminate costly tax breaks for the best-off taxpayers. 

The Senate’s plan does indeed move the starting point for calculating North Carolina income taxes to federal AGI, but the move is completely revenue-neutral and only meant as a way to simplify tax forms. This would do nothing to truly reform its narrow tax base.  Rather than walking through a series of calculations to add back the difference between the state and federal amounts for the standard deduction and personal exemption, under the plan, taxpayers would simply subtract the state amounts from federal AGI and still be allowed to take all of their federal itemized deductions (with the exception being the deduction for state income taxes).  Social Security income would also continue to be exempt from state taxation.

The North Carolina Budget and Tax Center said in a statement about the Senate budget plan that “these measures will do nothing to improve the upside-down nature of the state’s revenue system. North Carolina’s revenue system must provide adequate revenue for critical investments and must be fair and equitable.”