North Carolina Senate Approves Income Tax Cap

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By Andrew M. Ballard

The North Carolina Senate has approved a bill that would cap North Carolina’s personal income tax rate for the second legislative session in a row.

S.B. 75 would lower the limit on income taxes in the state’s constitution from its current level of 10 percent to 5.5 percent. The bill passed the Senate March 14 by a margin of 36-13 and now goes to the House of Representatives for its consideration.

The vote was largely along party lines, with Republican members mostly voting for the legislation and Democrats against.

To take effect, the measure also must receive approval by at least three-fifths of the total membership of the House (72 out of 120 members) and then a majority of voters in the November 2018 election. Its fate in the House is uncertain—in August 2015 the Senate approved legislation that would have set a 5 percent cap, along with spending restrictions and emergency reserve requirements, but the House failed to pass it during that legislative session.

Limiting Options

North Carolina’s personal income tax rate is 5.499 percent, so the pending measure would essentially prevent any increases.

Proponents of the measure argue that keeping income tax rates low makes the state attractive for relocating people and businesses and helps control government spending. Opponents say it ties the hands of future lawmakers, threatens the state’s credit rating and could require other more regressive revenue measures in the future, such as sales and property tax hikes.

Alexandra Forter Sirota, director of the North Carolina Budget and Tax Center, a Raleigh-based advocacy group, said in a statement provided to Bloomberg BNA March 15 that the pending bill would “lock in what is essentially a giveaway to millionaires and likely shift the state’s reliance to the sales tax, while also putting more pressure on local governments to raise property taxes.”

The imposition of a “low and arbitrary income tax cap” hamstrings lawmakers from addressing citizen needs in the future, according to Sirota. “This has always been a bad idea for North Carolina, and it still is,” she said.

2017 Different?

William W. Nelson, a partner with Smith, Anderson, Blount, Dorsett, Mitchell & Jernigan, LLP in Raleigh, told Bloomberg BNA March 15 that the pending bill “is consistent with the policy that the leadership in the General Assembly has pursued over the last few years to bring down income tax rates and broaden the base of both the income taxes and sales taxes.”

Although the House previously failed to act on a similar effort, “a couple of things are different” that might improve the measure’s chances this year, Nelson said. The current year is a “long session” and representatives have more time to consider the issue; the two houses of the Legislature might cooperate more closely to pursue a common agenda as the political situation has changed with a Democratic governor; and S.B. 75 is more limited in focus than the legislation the Senate passed the last time, he said.

Nelson said he couldn’t predict how voters would act on the measure were it to pass the Legislature, but “I think that rate caps generally have an appeal.”

House Republican leaders and their representatives didn’t immediately respond to requests for comment.

To contact the reporter on this story: Andrew M. Ballard in Raleigh, N.C. at aballard@bna.com

To contact the editor responsible for this story: Ryan C. Tuck at rtuck@bna.com

For More Information

Text of S.B. 75 is at http://src.bna.com/mhG

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