RALEIGH, N.C. (AP) — A broad tax cut proposal from North Carolina Senate Republicans that began its advance in the chamber on Tuesday also contains federal COVID-19 relief money to give more aid to businesses that previously received federal or state pandemic assistance.
GOP finance leaders unveiled an amended version of its tax plan, some of which was already revealed in March and contained an individual income tax rate reduction and more generous standard deductions. The latest edition also would increase the amount of per-child deductions by $500. If approved, more low-income individuals would pay zero income tax, and all individual filers would see their monetary tax burdens reduced.
Republicans have made rate reductions and deduction increases a cornerstone of their fiscal policy since a landmark overhaul in 2013 consolidated taxes to one flat rate and scaled back credits.
“We are proposing yet another tax cut because we believe people spend their money better than government does,” Sen. Paul Newton, a Cabarrus County Republican and Senate Finance Committee co-chairman, said during a news conference. “Allowing North Carolinians to keep their own money is the best form of stimulus our economy could have.”
The new version also attempts to assist business owners and some nonprofits that received the federal forgivable Paycheck Protection Program loans and other government assistance to keep employees hired during the pandemic. State law prevented PPP recipients from treating loan proceeds as business expenses that could be deducted, leaving an otherwise higher tax burden that business owners say would impair their recovery. The House passed legislation that would allow the deductions, resulting in smaller tax bills.
The Senate GOP tries to address that monetary loss instead by creating a program that would set aside $1 billion of North Carolina's share of American Rescue Plan funds to send grants automatically to any entity that received PPP loans or awards from four other business relief programs. These grants would be based on aid received but capped at $18,750.
Newton said the grant proposal would benefit as many as 400,000 businesses, or potentially double what the House plan would assist.
“We believe that it’s a better alternative,” he said. It also gets legislators who received PPP loans out of the uncomfortable position of voting for a law that would directly reduce their company's taxes.
The new version also envisions doing away with the corporate income tax, currently at 2.5%, by 2028. The latest reductions wouldn’t begin until 2024. The rate was 6.9% in 2011. A zero rate has been a goal of Senate Republicans for a decade, saying it would provide a permanent way to attract new companies to North Carolina. The measure also would adjust how the business franchise tax is calculated in a way that will favor North Carolina-based businesses.
The bill was heard in the Senate Finance Committee later Tuesday, and was expected to reach the chamber floor in the next week or two for a vote. It likely will end up in the Senate version of its two-year budget and would be negotiated with the GOP-controlled House, which in recent years has taken a more cautious view on tax breaks.
Any final tax changes would go to the desk of Democratic Gov. Roy Cooper, who has vetoed past budgets because he said they disproportionately cut taxes for corporations and high-wage earners while education needs are great.
Senate Republicans went to great pains on Tuesday to show that that K-12 per-pupil spending has grown since Republicans took control of the legislature 10 years ago, and that lower-income families would see a greater percentage decline in income taxes than high earners. A family of four making the state’s median household income of $54,602 would see a 21% decline in taxes, according to GOP leaders.
Still, Cooper's office quickly panned Tuesday's measure, contrasting it with the “once-in-a-generation opportunity” to spend pots of money on critical needs and provide “tax cuts for families who really need it.”
“The last thing we need is more sweeping tax breaks for corporations and the wealthiest among us instead of investments in our hard working families and communities,” Cooper spokesman Ford Porter wrote in an email.
The updated tax proposals would result in the state collecting $2 billion less that it would otherwise bring in through mid-2023, according to the legislature’s fiscal analysts. Senate Republicans said the state’s positive fiscal picture will keep its coffers full despite the tax reductions.
The plan would decrease the individual income tax rate of 5.25% to 4.99% next year, and increase the amount of income not subject to taxes for all filers. For example, the standard deduction for a married couple filing jointly would increase from $21,500 to $25,500 in 2022.