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Report: Chance at being national leader on tax rate

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(The Center Square) – As a conference committee works to finalize a biennial budget in the General Assembly, new analysis finds “pro-growth” proposals from both chambers “would further improve North Carolina’s competitive standing.”

Republican supermajorities in the General Assembly tied approved legislation to expand Medicaid to Gov. Roy Cooper’s approval of House Bill 259, the budget bill for fiscal years 2024-25.

The situation puts added pressure on Cooper to sign off to secure one of his top policy objectives since taking office in January 2017, with the start of the new fiscal year looming on July 1. Cooper is term-limited, has had two vetoes this session overridden into law, and four other overrides await voting in the House of Representatives with a Senate stamp already upon them.

While chamber leaders have said negotiations are progressing toward a compromise on a final budget they expect in late June, or early July, analysis from the nation’s leading independent tax policy nonprofit released Wednesday suggests the result will undoubtedly benefit taxpayers. The fiscal year starts July 1, with previous spending in place if a budget is not.

“North Carolina has been one of the foremost leaders in pro-growth state tax reform and relief over the past decade, and the state has an opportunity to further reinforce that legacy this year,” according to the Tax Foundation.

The analysis notes both Senate and House budget proposals aim to accelerate personal income tax reductions by going to 4.5% in 2024. While the House plans to continue with existing scheduled cuts in subsequent years to 3.99% by 2027, the Senate would further accelerate reductions to 2.49% by 2030.

“If lawmakers phase down the rate to 2.49 percent by 2030, North Carolina would be on track to have the lowest individual income tax rate on wage and salary income in the country,” according to the report.

Other proposed changes involve an increase in the standard deduction for singles and married couples filing jointly and a five-year phase down of the corporate franchise tax in the House proposal, both of which support growth, though the Tax Foundation suggests indexing the standard deduction to inflation to maximize the benefits.

The franchise tax, which is not capped, disincentives investment and is only levied by 16 states, including several working to phase it out. The analysis also highlights a House budget proposal to repeal the state’s privilege license tax imposed on certain professions that’s “burdensome to comply with” and “departs from the principle of neutrality in that it is levied arbitrarily on some professionals but not others.”

The Tax Foundation contends “priority should be given to provisions that would provide tax relief in a pro-growth or structurally sound manner.

“That can either further reductions to the individual income tax rate, but reducing the franchise tax rate and repealing the privilege license tax offer even greater ‘bang for the buck,’ since the franchise tax is a tax on in-state capital investment (and thus discourages it), and the privilege license tax has anomalously high compliance costs for a tax that raises such little revenue,” according to the analysis.

“Both the House and Senate plans are pro-growth, and either approach would further improve North Carolina’s competitive standing, but the franchise tax in particular is the greatest outlier in an otherwise competitive tax code, and reducing its rate is a goal worth pursuing.”

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