*Updated Thursday, Aug. 12
Leaders in the N.C. House have taken another important step forward in the General Assembly’s bi-annual budget negotiation process, passing their proposed version of the budget with bipartisan support. The proposal, which follows a budget proposal passed by the Senate earlier this summer, contains raises for teachers and state employees and numerous tax changes and other measures that would impact job creators and North Carolina families.
With the House budget finalized, the House and Senate will still need to negotiate a compromise budget before seeking Gov. Cooper’s consideration. The two chambers previously agreed to align their budgets so as not to exceed topline amounts of $25.7 billion for the current fiscal year and $26.7 billion next fiscal year. It is in the details where the two budgets differ. As it stands, chief measures in the House budget include:
- A reduction to the personal income tax rate impacting families and many small and mid-sized businesses to drop this tax from 5.25 percent down to 4.99 percent (the Senate proposed a reduction to 3.99 percent).
- A reduction to the corporate income tax rate that would lower this tax from 2.5 percent to 1.99 percent (the Senate proposed a multi-year, incremental phaseout of this tax).
- Simplification of the regressive franchise tax levied on business assets to ensure businesses are assessed this tax only on a net worth base, rather than the current, more complicated, more burdensome formula that considers the highest of three bases. This matches a measure proposed by the Senate in their budget.
- Tax deductions for businesses with forgiven loans from the Paycheck Protection Program.
- Increases to the standard deduction amount from $21,500 to $25,500 for married couples filing jointly and from $10,750 to $12,750 for individual filers.
- A measure to make permanent the historic preservation tax credit.
- $5.8 billion in state spending toward capital construction projects over the next two years and $2.8 billion in surplus revenue allocated to the state’s emergency fund.
- Raises for most teachers and state employees amounting to average teacher raises of 5.5 percent over two years and raises for state employees of 5 percent over two years.
- $300 bonuses for all teachers and $500 bonuses for state employees and educational staff employed during the worst of the pandemic.
The House’s budget, like the Senate’s, contains measures impacting several major Chamber priorities this session, including education and workforce development, franchise tax reform and infrastructure funding. Franchise taxes (which tax businesses on their assets and are also known as capital stock taxes) have grown increasingly uncommon of late as states have recognized these taxes as a major impediment to new investments. In North Carolina, our uncapped, overly complicated franchise tax unfairly targets capital-intensive industries and struggling small- and mid-sized businesses. Only 16 states continue to impose such a tax, and four of those are phasing theirs out.
A recent analysis from the nonpartisan Tax Foundation research group, called Location Matters, found that North Carolina businesses enjoy some of the lowest effective tax rates in the nation. However, it also found that new capital-intensive manufacturers experience the highest tax rates here in North Carolina relative to their counterparts in other parts of the country. The franchise tax adjustment included in both the House and Senate budget would streamline tax calculations and reduce administrative complications for these and other businesses, resulting in direct bottom-line savings for the vast majority of job creators across the state.
While the NC Chamber would ultimately like to see this regressive tax lifted entirely, we are encouraged by the direction of this formula change. As budget negotiations move forward in the coming weeks, we look forward to working with legislators from both chambers to ensure the collective voice of our state’s job creators is heard and considered in all policy decisions impacting business.