public policy advocacy for the professional engineer                                      July 26, 2013

Legislature Adjourns

Today the legislature adjourned after passing some significant and sometimes controversial legislation that will dramatically change the landscape of North Carolina.  From tax reform passed earlier this week, to the voter I.D. and Charlotte Airport takeover legislation accomplished  late last night and into the early morning, lobbyists, interest group and concerned citizens struggled to keep up and respond to   the vast changes being proposed.  With adjournment, now comes the difficult task of assessing what it means for us as individuals as well as for your business and your profession.

Although it will take weeks to analyze the impacts of the budget  passed earlier this week, and the  numerous pieces of legislation enacted (HB 74, passed last night, was 68 pages long), the debates over North Carolina’s tax climate are over, at least for now, and a summary is provided in this update.

Governor Signs Tax Reform Legislation

The Conference Committee version of HB  998 was signed by Governor McCrory on Tuesday and the full text can be found here.  The bill is less comprehensive than the versions initially proposed and does not include taxing professional services i.e., engineering services.

Below is a high-level summary of the current tax law:

Individual Income Tax:

  • Income tax brackets are eliminated and a flat tax instituted.
  • Rate is reduced to 5.8% for 2014 and to 5.75% for 2015.  Previous rates were indexed and ranged from 6.0% to 7.75%.
  • Personal exemptions are replaced with increased standard deductions.
  • Other adjustments to income are streamlined and simplified.
  • Credits related to disabilities, donations, federal retirement benefits, child care/employment/education and certain agribusiness are eliminated.
  • Gambling winnings are taxed
  • A study is recommended to analyze possible changes to low-income housing credit.

Corporate Income Tax:

  • Tax rate is dropped to 6% for 2014 and 5% for 2015 from the current 6.5%.
  • If 2016-17 budget targets are met, the rate would fall further but a study will analyze target formula implementation. 
  • System of credits is left as is though many credits will sunset if not renewed – except R&D credit extended through 2015.
  • The state’s economic development incentives, found in Article 3J (jobs and investment credits) are scheduled to sunset at the end of this year.
  • A study is recommended to analyze “net economic loss” deductions.

Sales and Use Tax:

  • There is no comprehensive sales tax base expansion; however, a study is recommended to analyze possible future taxation of more services.
  • Certain service agreements for the repair and maintenance of goods would become taxable – some provisions are not clear.
  • Certain events admission sales would become taxable at full sales tax rate instead of lower privilege tax rates.
  • Expanded Department of Revenue tax dispute settlement authority to deal with liabilities related to implementation of new service agreement and admissions sales taxes.
  • Electricity and piped natural gas would become taxable at full sales tax rates, instead of lower power/fuel tax rates; a study is recommended to analyze distribution of the new electricity and gas taxes
  • Manufactured and modular homes would become taxable at full rates.
  • Agricultural exemptions are changed.
  • Nutritional supplements, bakery bread, and newspaper sales tax exemptions are repealed.
  • Student meals exemption is repealed but largely reinstated through amendment to school meals exemption (would now cover charter and regional school meals).
  • Sales and use tax holidays are eliminated.
  • Annual nonprofit/hospital drug refunds are capped at $45 MM.
  • Business-specific refund incentives for passenger air carriers and motorsports are extended through 2015.
  • A study is recommended to analyze possible changes to the current 1%/$80 per article preferential tax rate for certain industries.

Estate Tax:

  • Is repealed retroactively to January 1, 2013
Motor Fuel Tax:
  • Capped at 37.5 cents per gallon (for the period of October 1, 2013 to June 30, 2015).  A study is recommended to analyze possible changes to preferential carrier fuel rates.
Business Franchise Tax:
  • No change but a study is recommended to analyze possible future changes to the calculation and remaining viability of this tax.
Privilege Tax:
  • Study recommended to analyze possible other changes.

(This summary was prepared by Womble Carlyle)

Ultimately, only time will tell if this tax reform plan has the desired effect of creating jobs and making NC more competitive with its neighboring states. 

A complete analysis of the budget and other significant legislation affecting the  Engineering Industry will be provided in the next few weeks.

  


If there are questions or you need additional information, please feel free to contact me at bbailey@penc.org or phone 919-834-1144, ext. 1.


Sincerely,

Betsy Bailey
Professional Engineers of North Carolina


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Professional Engineers
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