Tax Reform Debate Heats Up in Raleigh

The debate over Tax Reform is well underway in the North Carolina Senate, as the Finance Committee continues to hold regular hearings on  a series of bills sponsored by members on both sides of the aisle.

SB 363, “Business Tax Reduction and Reforms,” was the first piece of out the gate. Filed by Senator Andrew Brock (R-Iredell), it would repeal the authority for cities and counties to assess local privilege license taxes and replace the state’s complex corporate franchise tax with a .135% annual business privilege tax paid by all North Carolina businesses, including those with limited liability (LLCs and LLPs). The tax would be assessed on the business entity’s net worth, defined as the entity’s total assets less its total liabilities, depreciation and amortization. There would be a minimum annual tax of $500 and a maximum of $5,000 on business entities other than corporations, and a maximum tax of $75,000 on holding companies. Companies that pay the new tax would be exempt from paying sales tax on business-to-business transactions, such as building materials, office supplies, accounting or legal services, and so on.

Senator Bob Rucho (R-Mecklenburg), one of the bill’s co-sponsors, told Charlotte NAIOP members last month that the intent of SB 363 is to create a source of revenue that would allow for the immediate reduction, and eventual elimination, of both the corporate and personal state income taxes. The Matthews senator has sponsored a pair of companion bills, SB 669 and SB 677, which do just that dropping the top personal income tax rate from 7.75% to 4.0% percent, and the corporate tax rate from 6.9% to 6.0% by 2016.

Earlier this year, Rucho laid out a comprehensive tax reform strategy that included a 1.0% Business License Fee and a 1.0% Real Estate Conveyance (Transfer) Tax — proposals strongly opposed by REBIC, the North Carolina Association of Realtors® (NCAR) and the North Carolina Home Builders Association (NCHBA). While the Business License Fee in S 363 is far lower, it would still tax companies on assets and holdings that may not be producing income, and is therefore a source of concern.

Another comprehensive effort to reform North Carolina’s tax system was outlined in legislation filed recently by Senator Dan Clodfelter (D-Mecklenburg). SB 394, “Lower Tax Rates for a Stronger NC Economy,” would immediately establish a flat 6.0% tax rate on both personal and corporate income, and modestly expand the sales tax base to dozens of now-untaxed services, including landscaping, pest control and concert tickets. It would also eliminate dozens of specific tax deductions, including the NC mortgage interest deduction, and replace them with a flat .6% annual tax credit. The bill would also impose a .125% Business Privilege Tax on all limited liability firms in the state, a rate sightly lower than that proposed in the Brock legislation. And as with SB 363, Clodfelter’s bill would eliminate all local business license taxes, a proposal already creating angst among cash-strapped counties and cities across North Carolina.

REBIC and other industry trade groups are continuing to analyze these bills, and will continue to keep you appraised of these and other Tax Reform proposals as they advance through the General Assembly.


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