Tax Reform

portait of small business owner: proud woman and her store

North Carolina is Back to Work  

“Despite tax cuts, North Carolina raking in more tax revenue.” 

Charlotte Observer, January 2016 

North Carolina’s unknown tax cut bonanza.”

Forbes, January 2016

North Carolina a top-ten state for job creation.

U.S. Bureau of Labor Statistics, November 2015

North Carolina ranks 2nd in Foreign & Domestic Direct Investments.

Global Location Trends, October 2015

North Carolina budget surplus reaches $445 million. 

Triangle Business Journal, June 2015

2016 Tax Reform

In 2016, the General Assembly and Governor Pat McCrory passed House Bill 1030 – 2016 Appropriations Act. In addition to passing a budget with controlled spending, this bill also provided another tax cut for working North Carolinians.

House Bill 1030 increased the standard deduction for taxpayers by $2,000 over two years. In other words, by 2017, the standard deduction for a married couple filing jointly would be up to $17,500. The standard deduction was only $6,000 as of 2013.

Most taxpayers have a choice of either taking a standard deduction or itemizing their deductions and will choose the method that gives them the lower tax. The standard deduction is a dollar amount that reduces taxable income and eliminates the need to itemize actual deductions.

2015 Tax Reform

In 2015 the North Carolina General Assembly cut personal income taxes and delivered take-home-pay relief to families for the second time in three years.  Starting in 2017 North Carolina’s personal income tax rate drops from 5.75 percent to 5.499 percent and the standard deduction – the amount of initial income on which no taxes are paid – increases for everyone by $500.

Removing another special tax break from the state revenue code, lawmakers let the Renewable Energy Tax Credit expire on December 31, 2015.  According to the N.C. Department of Revenue, the Renewable Energy Tax Credit will prevent more than $1 billion in state revenue collections from energy companies by 2025.

Consistent with growth-driven tax reform principles that close loopholes, reduce rates and tax economic consumption rather than income, lawmakers also broadened the sales tax base to cover installations, maintenance and repairs of tangible personal property such as cars and appliances.

In 2011, General Assembly leaders resisted demands from then-Governor Perdue to permanently install a $1 billion annual sales tax increase.  By holding the line on spending and broadening the sales tax base to cover services, the new North Carolina leadership resisted calls from previous administrations to raise rates and kept its sales tax at 6.75%.  State taxpayers enjoy a lower sales tax rate on all their purchases – in addition to significant income tax reductions – with a substantially reduced overall tax burden under this approach.

North Carolina’s corporate income tax rate dropped from 5% to 4% on January 1, 2016, ‘triggered’ by a $445 million budget surplus and lawmaker agreement that ties corporate tax rate reductions to revenue collections.

2013 Tax Reform

“North Carolina, with a 25 percent reduction in the top rate, pretty much blew the other states away.”iv

Patrick Gleason, Director of State Affairs at Americans for Tax Reform

With a Depression-era tax code featuring some of the nation’s highest tax penalties on work and investment, North

Happy family having fun outdoors and smiling. They are on the field, the last rays of the sun.

Carolina’s unemployment rate had been above the national average for 13 straight years, and had been among the five highest for the past few years.

In July 2013, the General Assembly passed, and Governor Pat McCrory signed, House Bill 998 – the Tax Simplification and Reduction Act. This new law was tax reform of historic proportions, providing much-needed tax relief for our struggling economy.

The reform package includes the largest tax cut in state history, reduces tax rates on all North Carolina families and workers, and makes the Tar Heel State far more competitive for investment and job creation: the Tax Foundation stated that the change would vault North Carolina’s business tax climate ranking from 7th worst in the nation to 17th best.v

Over the next five years, the Tax Simplification and Reduction Act will result in $2.44 billion in tax relief to North Carolinians.

Personal Income Taxes

Beginning in January 2014, the individual income tax changed from a three-tiered system with a top rate of 7.75 percent to a simplified, single 5.8 percent rate. Income taxes will be cut again to 5.75 percent in 2015.

Along with lowering rates, a larger standard deduction of $7,500 of income for singles and $15,000 for married filers was created.

Social Security income is still exempt from the state income tax.

Corporate Income Taxes

The corporate tax rate – formerly highest in the southeast, at 6.9 percent – was reduced to 6 percent in 2014. The corporate rate will lower to 5 percent in 2015, and if certain revenue targets are met, the corporate rate would decrease to 4 percent in 2016 and 3 percent in 2017.

Other Taxes

In the Tax Simplification and Reduction Act, North Carolina’s estate tax – also known as the “Death Tax” – was repealed retroactively to January 1, 2013.

The state sales tax rate of 4.75 percent and local rate of 2 percent remain unchanged; keeping combined rate the combined rate/combined rates at 6.75 percent for most counties.

Happy Asian family holding hands walking over green lawn2011 Tax Reform

In the spring of 2011, the North Carolina General Assembly – under new leadership – faced a continued budget crisis. Because of the short-sighted reliance on temporary tax and federal stimulus funds utilized by the administration of then-Governor Beverly Perdue, General Assembly budget writers were handed a daunting $3.1 billion budget gap for the FY 2011-12 budget.i

In order to fill the budget gap, Governor Perdue proposed making a $1 billion “temporary” sales tax increase permanent, but conservative legislators at the General Assembly opted to let the tax increase sunset. Instead of raising taxes on North Carolinians, they cut spending and balanced the budget.

In fact, even with an empty “rainy day fund” (depleted in 2009), the General Assembly balanced the state 2011-12 budget – again, without raising taxes. As North Carolina’s economy continued to struggle, the budget returned more than $2 billion to North Carolina’s families.ii

General Assembly budget writers also managed to include nearly half a billion dollars in small business tax relief. iii 

iSOURCE: “North Carolina’s FY 2011-12 Budget Gap,” Fiscal Brief presented by Fiscal Research Division of the North Carolina General Assembly, Dec. 2010. This preliminary estimate projected a FY 2011-12 budget gap at $3.7 billion. Available at:
iiThe “temporary” sales, income and corporate taxes were estimated to cost $1.2 billion in FY 2010-11. Using that as a baseline, it is safe to estimate that if these taxes would have continued through the FY 2011-13 biennium, it would have cost taxpayers well over $2 billion over the course of those two years. Source: Joint Conference Committee Report on SB 202
iiiThe “Small business tax relief package” was projected to save small business $135 million in 2011-12 and $335 million in 2012-13. Estimates available at:
ivSmith, Barry. “N.C. Tax Reform Plan ‘Blew Other States Away,’ Analyst Says.” Carolina Journal Online: Covering news, politics, and policy in North Carolina. Carolina Journal, 17 July 2013. Web. 3 May 2014.
vDrenkard, Scott, and Joseph Henchman. “2014 State Business Tax Climate Index.” Tax Foundation. Tax Foundation, 9 Oct. 2013. Web. 3 May 2014.