Today, the Senate introduced a major tax package in the proposed Senate Committee Substitute to H334. The Senate Finance Committee had a hearing on the legislation but no vote was taken. The bill will be voted out of committee tomorrow and will pass the Senate as early as Thursday.

The focus of the bill is a reduction in personal, corporate and franchise taxes.

The bill summary provides detailed information and we ask that you review it closely.

Political Outlook – The bill will pass the Senate next week at the latest. As it is a House bill, we expect the House to vote to nonconcur and the final bill will be negotiated through the conference committee process in tandem with budget negotiations.

Note the reduction of the franchise tax and elimination of the corporate tax while not expanding Medicaid is considered controversial by the governor. In addition, the Senate’s version of PPP maintains the state’s status of not coupling with the federal government like 48 other states. The House took a hardline vote supporting PPP tax forgiveness a couple weeks ago.

This bill marries a number of controversial tax matters, with the routine broadly supported tax policies like SALT parity and Mill Rehab tax credit.

Highlights:

  • Reduces personal flat income tax rate from 5.25% to 4.99%.

  • Increases the standard deduction from $21,500 to $25,500 for joint filers.

  • Phases in a corporate income tax reduction over the next seven years, ultimately eliminating the corporate income tax.

  • Simplifies and reduces the corporate franchise tax by eliminating the two alternative franchise tax bases that are calculated on a taxpayer’s property investments in the State.

  • Uses ARPA funds to provide a grant program for businesses that took the PPP loans rather than allowing them to take tax deductions for business expenses paid for with the PPP loan. The maximum grant a qualifying business could receive per award amount would be $18,750.

  • Reduces the medical tax deduction from 10% to meet the federal 7.5% rate.

  • SALT – Allows pass-through entities to elect to pay the State income taxes at the entity level thereby reducing their taxable income at the federal level.

  • Extends Mill Rehabilitation Tax Credit by 2 years.

  • Transfers sales taxes from short-term car rentals from the General Fund to the Highway Use Fund at NCDOT.

  • Creates parity in short-term car rentals through peer-to-peer programs.

The fiscal impact to the state is a reduction in revenue ranging from $500 million to over $2 billion over the next 5 years. Senator Newton noted the state could afford these reductions while maintaining the current state budget while accounting for population growth and inflation.

The bill also anticipates continued revenue growth of 3-4%  based on more business coming to NC and more spending by citizens due to these tax changes.