RALEIGH — As Senate Republicans unveiled more details about their long-awaited tax overhaul proposal on Tuesday, they said lowering income tax rates and expanding the scope of the sales tax is fair to all, would boost the state’s economy and cut taxes for most people. But critics say poor people will pay more overall.
The three-year plan would reduce individual and corporate income tax rates, as well as slightly drop the combined state and local sales tax rate that consumers in most counties pay from 6.75 percent to 6.5 percent. The plan also would eliminate the estate tax. But the overhaul would make North Carolina’s sales tax base one of the broadest in the country by eliminating exemptions and expanding it to apply to most services.
Senate leader Phil Berger, R-Rockingham, and other GOP tax-law writers said the overall proposal would cut taxes by more than $1 billion while moving away from a 1930s-era tax system that they say doesn’t encourage economic growth. The current tax plan has led to increasingly high rates and carved out exceptions in an attempt to pick winners and losers in the economy, he said.
North Carolina needs a more consumption-based tax system to replace a system that has led to stubbornly high unemployment rates, falling median income and increasing poverty rates, said Sen. Bob Rucho, R-Mecklenburg, one of the plan’s authors. The more robust state economies ascribe to such a tax code, he said.
“The existing system has failed us, and what that means is we need to find an alternative that will create the jobs that put North Carolinians back to work,” Rucho said. “We believe this plan will accomplish that.”
Berger estimated that under the plan “the overall tax situation for the vast majority of people will be that they will pay less.” But Democrats and others said the Senate’s plan will shift the tax burden to poor and middle-income residents and older adults as taxes are shifted away from income and to goods and services.
“The Senate leadership has pursued a shift in tax burden from the rich to the poor, not tax reform,” said the North Carolina Budget & Tax Center, which lobbies on behalf of poor people.
A tax calculator provided at a web site assembled by Senate Republicans to highlight the plan indicates upper-income taxpayers and low- and middle-income families with two of fewer children would benefit most from the tax changes. Senate Republicans point out lower-income residents receive public benefits that aren’t taxed.
Two of the largest exemptions — the state’s portion of the tax on groceries and the combined exemption on prescription drugs and insulin — would be eliminated, Berger said. That means the products would be taxed at the full 6.5 percent rate, generating hundreds of millions of dollars annually.
“They’re cutting taxes for the wealthiest of the wealthy and paying for it by taxing vital services and goods for the middle class,” Senate Minority Leader Martin Nesbitt, D-Buncombe, said in a statement. “This plan takes those struggling the most and makes life a little harder.”
House and Senate Republicans and Gov. Pat McCrory have all said they want a tax overhaul this year, but the Republican governor and House leaders have been more cautious about the extent of tax reform. House Speaker Thom Tillis, R-Mecklenburg, called the proposal “a positive first step” and hopes legislative leaders and McCrory can reach a consensus plan.
“A number of tax bills have already been filed and we anticipate more to come,” McCrory said in a statement.
Senate Republicans haven’t yet introduced a bill, saying details and revenue levels generated by the plan are still being worked out. But documents obtained by The Associated Press detailing the draft proposal show how the scope of the sales tax would be broadened.
North Carolina has a sales tax on about 30 services. The proposal would add another 100 or so services to the list, including all kinds of repairs, personal services like haircuts and massages and professional services like those attorneys provide. Other services that would be subjected to the sales tax include pet grooming, commercial linen supplies and window cleaning.
“The current concept is if a service is being taxed in another state, then it would be part of the expanded base,” Berger said. Business-to-business transactions would be exempt from sales taxes expanded by the proposal.
Expanding the sales tax is sure to bring out interest groups that don’t want their products or services taxed more. Broadening the sales tax, however, to cover nearly all transactions may mitigate those complaints because everyone — including consumers — would have to pay more.
“Why is it fair to tax the service on a car repair but you don’t tax an attorney fee?” Berger said. “Why is it fair to tax that service for a car and you don’t tax the accounting fee?”
Sabra Faires, a former longtime legislative and state government staff attorney now in private practice, said it’s unclear whether the proposal is an effective tax overhaul because there’s still no legislation released.
“The basic question remains — what is taxed under the plan and what is not?” Faires wrote in an email.