RALEIGH — N.C. Senate leader Phil Berger said Wednesday that he believes an overhaul of North Carolina’s tax system will happen this year and that he prefers a plan to make income tax rates as low as possible — maybe even zero.
Speaking to reporters about this year’s N.C. General Assembly session, Berger said senators are considering a proposal to eliminate individual and corporate income taxes altogether. Legislators would make up for billions of dollars in lost funds in part by shifting to a consumption-based tax system that would involve most services currently exempt to the sales tax, such as auto repairs, haircuts and lawn services.
The state’s income taxes are among the highest in the Southeast. North Carolina’s corporate income tax rate is 6.9 percent, while the individual income tax rate for the highest wage earners is 7.75 percent.
At a news conference, Berger, R-Rockingham, said: “At this point I don’t know if I could give you what that possible outcome is, but I can tell you that we’re going to shoot for the lowest possible (rate), and zero is the absolute lowest.”
He added: “We will get a tax reform bill this session.”
A plan being floated by Berger’s lieutenants would raise the sales tax rate — the combined state and local sales tax rate is now 6.75 percent for most counties — to less than 8 percent in exchange for the eliminated income taxes. The state’s share of the sales tax on groceries also could be restored 15 years after it was eliminated. Local governments currently collect a 2 percent sales tax on food.
The idea of a tax overhaul isn’t new, but prospects for a retrofit appear strong, with Republican control of the Legislature and new GOP Gov. Pat McCrory interested in the idea. McCrory has said he wants income tax rates to drop to at least those of neighboring states.
Lawmakers from both sides of the aisle have talked for decades about changing a tax system whose sales tax base has eroded over the years because of exemptions and an economy that has tilted from manufacturing to the service sector. When additional funds have been needed, legislators have raised the sales tax rate, reaching 7.75 percent in 2009. Republicans pulled the rate back by a penny in 2011. A 2011 N.C. Department of Revenue report counted at least 100 sales tax exemptions, preferential rates and caps in state law valued at more than $3 billion.
N.C. Sen. Bob Rucho, R-Mecklenburg, the chamber’s point man on a tax overhaul, said the plan lacks specific legislation for now and could be phased in over time. Rucho said the proposal would reward companies that make money through innovation and provide an incentive for job creation. Workers also would have more money in their prospects to spend or save.
“This is a concept that will be chewed on by the House and Senate and the governor, trying the best way of achieving our goal of economic growth and jobs,” Rucho said.
Rucho, however, provided some parameters. He said he expected that the combined state-local tax rate would “always be less than” 8 percent under the plan and could fall in later years.
In addition to broader sales tax, Rucho said the lost income taxes — estimated at $10 billion, or roughly half the state’s annual budget — would be replaced in part with a license fee for all businesses. Business-to-business transactions wouldn’t be subject to the sales tax, he said.
Expanding the sales tax is sure to bother interest groups that have benefited from exemptions for years, while higher proposed taxes will galvanize others. The N.C. Association of Realtors already is sounding the alarm because a higher tax on property sales, currently at 0.2 percent of a property’s value, is being considered.
“While we applaud lawmakers’ interest in reforming North Carolina’s tax system, we believe that property owners already pay their fair share,” association President Patrice Willetts said Wednesday in a statement.
The liberal-leaning North Carolina Budget & Tax Center supports tax reform but said cutting or eliminating income taxes isn’t an effective way to create jobs and will swing the state’s fiscal burdens toward the poor.
“These kinds of proposals will only skew our tax system in favor of the wealthy,” center director Alexandra Sirota said.
N.C. House Speaker Thom Tillis, R-Mecklenburg, believes that while “all ideas should be on the table ... we must take a pragmatic approach with an understanding of the full effects of any plan that is proposed,” spokesman Jordan Shaw said.
Democrats in charge of the General Assembly tried for years, most recently in 2009, to hammer out tax reform but couldn’t reach an agreement.