Some Surprise Taxes in North Carolina Senate Proposal

The North Carolina Senate developed a tax reform package last week; and it was reported to have some good elements.  However, Brian Balfour at Civitas has uncovered two problematic provisions (italics are mine):

The Senate plan would change the tax treatment of business inputs. Manufacturing and farm equipment, and other depreciable property would be exempt from the current 1 percent tax levied on them. Other supplies and accessories purchased by businesses, however, would be taxed at the general sales tax rate (a combined 6 percent in the Senate’s plan – see more below)

• While designed to encourage business investment in productive capital goods, the net result of this change is a tax increase on businesses. The change may encourage companies to purchase more equipment and machinery, but overlooks the expense of accessories and complementary goods required for their upkeep. Given the net result is a tax increase, in the long term this tax change may do more harm than good...

State income for taxable purposes would follow the federal adjusted gross income guidelines. By this standard, significantly more income would be subject to the state income tax. This higher taxable income would then be offset by a number of changes in order to bring the taxpayer’s burden back down close to the current level...

In the end, the Senate tax plan would result in an overall net increase in the state income tax burden, but with roughly 90 percent of taxpayers experiencing a decrease in their income taxes.The increase would be shouldered by the top 10 percent of income earners, which includes a large number of unincorporated small businesses.

These two measures-- applying sales tax to business purchase of supply items, and raising taxes on high wage earners-- are attempts to raise revenue in stealth fashion.  Bring a whole new universe of business activity under the tax system; and preserve and enhance the already problematic element of excessive progressivity in our state income tax code.

The Senate appears to have found a way to chase away prospective employers in the course of allegedly trying to fix our tax system.

Comments

[Bubba]

And the functional increase in sales tax on services not currently taxed is particularly odious. The reduction in tax rates will be small compared to the revenue raised by the new taxes.

Next up will be an attempt to end run around the restrictions on red light cameras (state/local revenue sharing is the key here), and the introduction of speed cameras throrughout the state.

Hide and watch the warfare that type of move will engender.

[Joe Guarino]

Bubba, you are right. The sales tax on new services will cost many citizens more than they save on the other taxes. But I am also concerned about the lesser known maneuvers highlighted in this post, both of which received little to know media attention.

In fact, the media coverage gave us the opposite impression-- that all income taxes were going down. And I do not recall any mention of a salex tax on business supplies, which will be inflationary to consumers, and costly for businesses that cannot pass it along to consumers.