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    Senate Tax Reform Changes NC Competes Act
    The Vault

    Senate Tax Reform Changes NC Competes Act

    June 2015

    The North Carolina Senate has made significant changes to HB 117, the NC Competes Act, which we detailed for you in April.  In its original form, NC Competes was an economics incentives program designed to draw investment into the state and boost job growth.  It sailed through the House with bipartisan support and eventually stalled in the Senate, where last week in Finance Committee, major portions of a sales tax redistribution bill (Senate Bill 369) were added to it and incentives scaled back.  The NC Competes Act now looks far different than it did just a few months ago.

    Proposed Senate changes include:

    • New sales tax on services:  To finance new income tax cuts, the bill would increase the sales tax base by now taxing expenses incurred from advertising, veterinary and pet care services, and repairs and maintenance work on personal property such as cars and homes.  Large nonprofits, including hospitals, would lose a sales tax exemption.  Proponents argue this would create $171.3 million each year in new revenue and move the state away from unfair and burdensome taxes on property and income.
    • Personal income tax cuts: Beginning in 2016, the personal income tax rate would be cut from 5.75% to 5.5%, and the standard deduction would gradually increase over a four year period.  This means that a married couple filing jointly wouldn’t owe income taxes on the first $18,500 of income by 2020.  A single person wouldn’t owe taxes on his first $9,250.  Proponents argue this will put more disposable income in people’s pockets and lower the tax burden on working people and families.
    • Corporate taxes: Over the course of three years, NC would begin using the “single sales factor” formula for calculating corporate taxes.  Companies’ tax liabilities would be based entirely on sales and no longer factor in payroll and property value.  This would be a major benefit to companies with extensive property and payroll in the state.
    • Sales tax redistribution: The bill proposes a new distribution formula for allocating sales tax revenues among counties.  The state would distribute 20% of revenues based on where sales occur, while 80% would be based on each county’s population.  The new version allows counties to decide how they will allocate revenue between city and town governments.  While this would offer a significant economic boost to poor counties, large counties like Mecklenburg have complained that the change amounts to a significant budget cut.
    • Job incentives: The bill would cap the Job Development Investment Grant, or JDIG, incentives – the state’s main job incentive program – which has been out of money for months. The state could offer up to $15 million each year and up to $30 million during a year in which the state lands a “high-yield project” bringing thousands of jobs. Companies could receive higher payouts in poorer counties. And in the state’s wealthiest counties, including Mecklenburg County, local governments would be required to pitch in with incentives of their own.

    So why exactly did this happen?  Quite simply, it’s politics.  By changing a bill that had already cleared the House, Senate leaders have created a much stronger negotiating position for themselves.  The House can’t send the new version back through its standard committee and public hearing process.  It can only approve the Senate version or vote it down, which would immediately prompt an attempt at compromise by legislators from both chambers.  It’s a bit of a sneaky move by Senate leaders aimed to redistribute taxes under the radar.   So far, no vote has been taken.  A large opposition is growing, however, so expect a bit of debate before anything becomes law.


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