RALEIGH – Gov. Pat McCrory signed the compromise budget agreement this morning, ushering in what many are calling historic changes to the state’s tax code. Last year’s $445 million budget surplus gave some breathing room for budget writers this year, resulting in a plan that passed the General Assembly with bipartisan support.
“I look forward to working with the General Assembly to implement these programs to make North Carolina an even better place to live and work and build the economic foundation for the next generation,” McCrory said in a statement this morning.
The drawn-out negotiations resulted in tax code changes that lawmakers say is part of a comprehensive plan to move from a mandatory tax system to a voluntary system. Just how to do that is the challenge.
Among the points of contention in the budget negotiations was a plan to give an economic boost to poorer counties hit hard by the recent recession. The Senate’s original plan included a 50/50 split for sales tax revenue between where the sale occurred (usually counties with higher populations) and a population-based distribution. Senate proponents said that the move is needed to help rural counties compete, but opponents — said the current formula was a compromise rural counties agreed to when the state agreed to take over more of the counties’ share of healthcare spending.
The compromise plan would send more money to economically disadvantaged counties. Urban counties objected to the change, particularly after the Privilege License Tax was eliminated last year. According to insiders, McCrory weighed in heavily on the redesign of the Senate’s proposed sales tax with the goal of helping poorer counties, where sales tax was not a major revenue generator, without harming the more urban or tourist areas.
What resulted from lawmakers’ months of number-crunching is a complex system that keeps the distribution the same that it is now, 75/25, but broadens the sales tax base to include services that are attached to any tangible item that is already subject to sales tax. For example, the installation or warranty on a dishwasher or car part would now be subject to sales tax.
Then, budget writers figured out how much counties would have received under the Senate’s sales tax redistribution plan and how much counties lost with the end of the Privilege License Tax and distributed that amount from the expanded sales tax to them. However, the money comes with a requirement that the counties put it toward local education.
The final deal anticipates an $85 million infusion into local governments. However, there is $17 million reserved in the budget for the plan in case the numbers don’t quite add up. If the broader sales tax revenue does not meet projections, the state will use that money to supplement the plan. The success of the new system will be reviewed every five years.
“After conversations with my own county, the bulk of these funds will be spent on increasing teacher pay there. This will allow them to afford to invest more in the county portion of education funding,” said Rep. David Lewis (R-Harnett) on the floor of the House Thursday night.
Also on the list of tax reform in the budget is the next phase of reducing the state’s corporate income tax. The last budget outlined a system of triggers based on economic growth in the North Carolina. The more the economy improves based on jobs created and spending, the lower the tax rate goes. The state Department of Revenue reported that the state economy hit the trigger to drop to four percent in August. The personal income tax rate also dropped in the budget from 5.75 percent to 5.49 percent , and the amount a family of four can earn tax-free was raised by $500.
Some tax credits and deductions reappeared in this budget after getting the ax last year. It fully reinstates deductions for medical expenses and makes them retroactive to the beginning of the 2015 tax year. The budget also brings back the historic tax credit. The credit allows businesses to write off 30 percent of the expenses of restoring an historic building. Homeowners will also again be able to write off their historic home preservation costs, but the amount will go down to 15 percent starting next year. The budget also allows the Investment Tax Credit for renewable energy projects to sunset on schedule at the end of 2015.
The budget also increases the state’s Rainy Day fund to $1 billion and stops the transfer of money from the Highway Fund to the General Fund, meaning $216 million more for highway construction and maintenance this year. Other items in the budget include additional funds for voter outreach ahead of the implementation of the Voter ID requirements in 2016 and a provision that sets aside $225 million to start restructuring the state’s Medicaid system. A bill to privatize the program is scheduled to be heard on the Senate floor Tuesday.