Tax reform legislation, including a proposal to enact a statewide business privilege tax, is among the dishes simmering in committee as the North Carolina General Assembly nears its crossover deadline, but political observers say it’s too early to tell what legislators ultimately will bring to the table.
All bills must pass either the House or the Senate before May 16 or they’re dead for this session, so the next few weeks should bring clarity, if not relief, for real estate, construction and development professionals keeping their eyes on proposed changes to the tax code.
Among the issues on the watch list is the business privilege tax, which would require all businesses to pay based on net worth, not income, a move that some fear would deter commercial investors from bringing capital to the state.
Joe Padilla, executive director of public policy for the Charlotte-based Real Estate and Building Industry Coalition, is one of the lobbyists watching several bills in play in the Senate Finance Committee.
“We’re looking at the entire picture and trying to determine what our priorities are as an industry,” he said.
Senate Bill 363, filed by Republican Sen. Andrew Brock of Iredell County and co-sponsored by Republican Sen. Bob Rucho of Mecklenburg County, would eliminate the state’s corporate franchise tax and replace it with an annual business privilege tax of 0.135 percent. Businesses would pay based on net worth, which is assets minus liabilities, depreciation and amortization. The tax would include capital and property that has yet to generate income. Padilla says the move would discourage capital investment.
“This is essentially a tax on equity,” Padilla said. “You’re going to have property owners who are saying it’s better to take out loans and convert equity to something else to reduce tax liability. That’s not where you want to go as a state. You don’t want to encourage business or investors to take on debt. You want them to put money in.”
Co-sponsor Rucho has said the intent of the legislation is to simplify the tax code and generate income to make up for revenue that would be lost by the proposed lowering of the state’s personal and income tax rates.
Rucho has sponsored two other bills aimed at the income tax. His Senate Bill 669 would reduce the personal income tax rate from 7.75 percent to 4 percent, and his Senate Bill 677 would reduce the corporate tax rate from 6.9 percent to 6 percent.
Also in the Senate Finance Committee is Senate Bill 394, sponsored by Mecklenburg County Democrat Sen. Dan Clodfelter. Padilla said Clodfelter’s bill puts more of the pieces of the tax-reform puzzle together in one place.
It would levy a 0.125 percent business privilege tax on all limited liability firms while setting a flat tax of 6 percent on personal and corporate income. It would eliminate the mortgage interest deduction, a proposal generally opposed by real estate groups, and replace it with a 0.6 percent tax credit.
“It’s the only legislation filed that is anywhere close to being comprehensive,” Padilla said.
Both 363 and 394 would eliminate city and county privilege taxes, which would leave municipalities with funding gaps.
Padilla hopes lawmakers will consider the unanticipated effects of legislation as they craft the bills.
Rep. Bill Brawley, a Mecklenburg County Republican, said he’s waiting to see which proposals will make it out of committee before getting too involved in the process.
“So many people are trying to cook that broth already,” he said.