New NC Budget: Higher Sales Tax, Lower Income Tax

North Carolina governor Pat McCrory signed a new budget into law Friday, marking the end of a near two month delay.  Infighting over Medicaid, economic development, and taxes stalled the passing of the budget, and lawmakers published a compromise bill just hours before McCrory signed it.  Included in the new budget are about $400 million in income tax cuts which will be offset by new sales taxes on repair, installation, and maintenance services.  

Will this new budget save you money?  Perhaps.  The income tax cuts are relatively modest for low-income taxpayers -- about $50 or less for households making less than $30,000.  That amounts to about 10% of their typical tax burden, as households in that income bracket typically owe about $500 or less in state taxes.  That $50 cut won’t benefit them if they spend more than $750 on repair, maintenance or installation fees during that calendar year, however, because the 6.75% sales tax rate in many counties will increase the cost of a $750 repair to $800.  For households making more than $95,000 a year, the income tax cut would increase to an average $476. As long as they don’t spend more than $7,000 on taxable services, they’ll see a net benefit from the tax changes.  So, in short, whether this year’s budget will save you money or tax you more depends on how much you make, and how much money you spend on the newly taxable services.  The expanded sales tax becomes effective March 1.

Proponents of the budget claim the shift away from income tax will mean a more reliable stream of revenue for the state and will help avoid recession revenue drops, thus preventing budget cuts.  Critics of the budget said that poor and moderate-income residents will be hurt more by increased sales taxes and fees than they will be helped by decreases in the personal income tax.  Overall, NC will get less revenue as a result of the income tax cuts.

Other tax and fee changes include:

• Increased DMV fees from 25% to 33%.
• Restoration of historic preservation tax credits, which expired at the end of 2014.
• Expansion of a new method to calculate corporate income tax over three years that favors in-state manufacturing companies that are selling most of their goods elsewhere.
• Reduction in personal income tax from 5.75% today to 5.499%  starting in 2017. The corporate rate already will fall from 5% to 4% based on a 2013 tax law.
• Increased standard deduction for individual income tax returns from $250 to $500, depending on filing status.
• Raise in annual vehicle tax from current $5 to $30, depending on municipality.
• Increased community college tuition (from $72 to $76 per credit hour for residents, from $264 to $268 for non-residents) starting in the spring semester.

The expanded sales tax becomes effective March 1, 2016.  The personal income tax rate won’t drop to 5.499% until 2017, so don’t expect to see the benefits of that until you file in 2018.