NC Tax Simplification and Reduction Act: What tax break?

Many North Carolinians are miffed by recent legislative reforms in the state.  They’re tired of politicians spouting mindless, scripted rhetoric.  The recent television ad with governor Pat McCrory saying “We’re stepping on the toes of the left and the right to make tough, necessary changes” only makes many North Carolinians more distressed.  In this commercial—paid for by a 501(c)(4) group called Renew NC—McCrory makes some generic claims about how he is making the state better.

The first talking point he mentions is lowering taxes to help families.  This is a reference to the Tax Simplification and Reduction Act that was passed in July, making changes to the state’s tax code.  The tax he is talking about is the state income tax, and it’s true that everyone’s state income tax will be lower next year.  Most of us, however, will be thinking “Whose toes are being stepped on?” and “What tax break?”  For most Tar Heels, the tax cut will have negligible effects, and doing a little math will show why.

House Bill 998, the Tax Simplification and Reduction Act of 2013, was signed into law in July.  Among the numerous tax revisions and deduction eliminations is the replacement of a progressive income tax rate with a flat tax rate.  The state has had a tiered income tax rate since 1921, and the new flat rate will go into effect in 2014.  Previously, there were three levels:

1:  A 6 percent rate for singles making up to $12,750 and for couples making up to $21,250

2:  A 7 percent rate for singles with an income between $12,750 and $60,000 and for couples making between $21,250 and $100,000

3:  A 7.75 percent rate for singles making over $60,000 and for couples making over $100,000 a year

Beginning next year, all taxpayers in North Carolina, regardless of income and/or status, will pay a state income tax of 5.8 percent; this rate will go down to 5.75 percent in 2015.  In essence, everyone will be paying less in state income tax next year.

However, for most of us it will be a minuscule difference, and we’ll be paying even more taxes in other areas.  Here’s the simple math:

  • If your income was $12,750 last year, you paid at a 6 percent rate, or $765, in state income tax.  Next year, you will pay at a 5.8 percent rate, or $739.50.  (Savings of $25.50.)  If your combined income with your spouse was $21,250 last year, you paid at a 6 percent rate, or $1,275.  Next year, your 5.8 percent rate will mean paying $1232.50 in state income tax.  (Savings of $42.50.)
  • If your income was $60,000 last year, you paid at a 7 percent rate, or $4,200, in state income tax.  Next year’s 5.8 percent rate will mean paying $3,480.  (Savings of $720.)  And if your combined income with your spouse totals $100,000, you will be going from $7,000 to $5,800.  (Savings of $1,200.)
  • If your income was $60,001 last year, your state income was at a 7.75 percent rate, or $4650.08.  Next year, it will be $3,480.06.  (Savings of $1,170.02.)  If your combined income with your spouse was $100,001, you paid $7,750.08 in state income tax; next year, you will pay $5,800.06.  (Savings of $1,950.02.)  The more you make, the more you will be saving in state income tax.

For most people, the savings in state income tax will fall between $100 and $1,000.  That might be nice until you realize all the other changes the Tax Simplification and Reduction Act will do.  There will be an elimination of personal exemptions, plus numerous tax credits—credit for charitable contributions of non-itemizers, credit for child care, credit for permanent and total disability, credit for education expenses, and credit for property taxes on farm equipment—are all being eliminated.  While the sales tax refund for nonprofits will be preserved, there will be an expansion of sales tax to include “entertainment activities” (movie tickets, museums, athletic events) and service contracts for warranty, repair, and maintenance of tangible personal property—not to mention the sales tax holidays are being eliminated.

When all said and done, you will be paying less in state income tax, but you will be paying more for ballgame tickets, more for the nutritional supplements sold by your chiropractor, more for getting an oil change, more for your children’s school supplies, and more for attending the State Fair.  Your taxes are not being lowered; they’re simply being reallocated into other areas.  Your net gain may simply be one more trip to the grocery store or the equivalence of one extra paycheck to stow away in savings.  Unless you are working in a non-profit—much like the group that made the recent rhetoric-filled commercial—you are not getting much of a tax break at all.

The governor suddenly found a few extra million dollars in the state budget and planned to give teachers a small pay raise, only after numerous protests and arrests at the State Capitol over the summer, of course.  Meanwhile, some of his Cabinet secretaries and campaign aides earned tens of thousands of dollars in pay raise without hesitancy.  Some of his staffers work in positions that were never even advertised, most notably in the Department of Health and Human Services.  Pat McCrory seems to be right when saying he is stepping on the toes of the left and right.  Unfortunately, it’s the toes on the average North Carolinians’ left and right feet.

David Pilley

David Pilley

David Pilley is a May 2010 graduate of the University of North Carolina at Chapel Hill, with a B.A. in communication studies and a creative writing minor. He is a native of Raleigh, North Carolina.

He played clarinet for the Marching Tar Heels in 2005 and 2006. He also volunteered for STV, the student-run television station at UNC-Chapel Hill, in the spring of 2010. He shot video, wrote scripts, and acted for “Off the Cuff,” UNC’s longest running sketch comedy show. He has the rare distinction of having lived in a dorm all four years of his undergraduate college career. He was also on Franklin Street on the night of April 4, 2009. His future plans are to pursue a master’s degree in journalism and to one day work for the media as a sports journalist or broadcaster.

Being one of eight children, David realizes finance is an important topic to everyone, regardless of his/her knowledge of the subject. His interests are in personal finance, budgeting, and savings.

In his spare time, David enjoys watching sports and standup comedy, as well as doing crossword puzzles and writing in the first person. He also thoroughly enjoys trivia and, one day, hopes to participate on the game show Jeopardy!, where he will try to break Ken Jennings’ 74-game win streak.
David Pilley

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