State Senator Bob Rucho doesn’t think North Carolina has an inefficient tax system. He doesn’t believe our tax code should be tweaked, modified or streamlined. He doesn’t even think we need to look at lowering our rates.
No, Senator Rucho thinks the state’s entire system of taxation should be thrown to the curb and replaced with something else.
Earlier this week, the six-term senator from Matthews visited with members of REBIC, the Charlotte HBA and the Charlotte Regional REALTOR® Association to present the details of his Tax Modernization Plan, which he expects to introduce shortly after the 2013 General Assembly gets underway at the end of January. Opening his remarks with a compelling case about the failure of North Carolina’s current tax system to either generate reliable revenue or attract new economic growth, Rucho made his pitch for shifting the state from a model that taxes production to one that targets consumption.
In short, Rucho’s plan would eliminate both the state’s Personal Income Tax (currently 7.75% at the top bracket) and Corporate Income Tax (currently 6.9%), as well as the Franchise Tax (now .0015% of a corporation’s taxable assets). In their place would be three new taxes:
A broad-based state Sales Tax of 8.05% (state and local) on all retail goods and services. While only slightly higher than the 7.25% currently charged in Mecklenburg County, the new tax would be levied on more than 180 services that are not currently taxed, including medical care, legal and tax services, association dues, and Realtor and brokerage commissions. But as Rucho envisions this, almost all business to business sales and services would be exempt from the sales tax. This could potentially include attorney or consulting fees for rezonings and entitlements, land planning and architecture fees, site grading and development costs and all materials involved in the construction of a new home or commercial building.
A Real Estate Conveyance Tax of 1.0%, paid each time a deed transfers hands from one property owner to another. So by the time a new home closes, it will potentially have had this tax levied three times – when the land is purchased by the developer, when the developed lot is purchased by the builder, and when the finished product is purchased by the homeowner. The Conveyance Tax would replace the state’s existing Deed Stamp Tax, currently levied at just 0.02% on each real estate transaction.
An annual Business License Fee of 1%, assessed in the following manner:
For corporations, the tax is levied annually against the value of the firm’s capital stock, paid-in capital (excluding retained earnings valued under GAAP). For multi-state corporations, the rate would be apportioned to North Carolina using single sales factor apportionment.
For sole proprietorships, partnerships, LLPs and LLCs, the 1.0% tax is levied annually against the owner’s equity determined under GAAP (generally assets less liabilities), with a $500 minimum.
Residential or commercial leases longer than 90 days would not be subject to either the Sales Tax or the Real Estate Conveyance Tax. Leases less than 90 days would be taxed at the 8.05% rate.
Residential remodeling services would be taxed at the 8.05 rate, but commercial remodeling jobs would be exempt as business-to-business transactions.
Rucho said the proposal was modeled with the assumption that some retail sales will disappear into South Carolina, and that the Department of Revenue would aggressively go after any North Carolinians who try to avoid paying the tax on goods purchased over the state line. We’re still concerned about the impact a higher sales tax would have on retailers, service providers and commercial property owners in South Mecklenburg County.
The tax proposal is designed to be revenue-neutral for state budgeting purposes, and Rucho suggested that a constitutional amendment may be considered as part of the package, to ensure that the General Assembly couldn’t revive the state income tax at some later date.
The Civitas Institute, a conservative think tank in Raleigh, just released a analysis of Rucho’s plan, which makes the case that had a consumption tax been implemented in 2000, North Carolina families would have seen $6,000 – $10,000 in higher personal incomes, and the state would have created an additional 378,000 jobs. You can review the study in its entirety on the Civitas website.
REBIC and our member associations still have a number of questions about Senator Rucho’s proposal, and are in the process of formulating specific feedback at his request. Tax Reform has repeatedly been identified as a top priority for the state in 2013, by everyone from Speaker Thom Tillis to Governor-elect Pat McCrory. But Rucho has thus far been the only lawmaker to put forth an actual proposal, and we appreciate his commitment to making North Carolina more competitive when it comes to attracting new jobs and economic development.
If you can provide any specific feedback about how this tax proposal will impact your business, please e-mail me the details at Joe.Padilla@REBIC.com. We plan to meet again with Senator Rucho by the middle of January to discuss our ideas.