A New Year, Old Challenges

Tax Reform

For the State of North Carolina, tax reform is key.

• 2011 includes several old challenges.

• It is time to take bold action to address these outstanding challenges.

Current General Fund Revenue

Baseline Revenue Growth, FY 1996-1997 to FY 2010-2011

NOTE: The last column represents the current forecast baseline estimate.Source: Fiscal Research Division, A Staff Agency of the North Carolina General Assembly.

Increasing Rates

Source: Fiscal Research Division, A Staff Agency of the North Carolina General Assembly.

Moving Forward to a More Reliable System

Average State General Fund, FY 2000-2001 to FY 2009-2010

Moving Forward to a More Reliable System

Eliminate Complexity in the System

Remove exemptions and credits that only individuals with tax accountants can take advantage of and understand.

Federal and State deductions and credits reduce State revenue by $2.5 billion.

• Federal itemized deductions reduce revenue by $1.3 billion.

• 38 state credits and deductions reduce revenue by $1.2 billion.

Suggestion

Allow certain itemized deductions (mortgage and charitable donations), but cap the amount deducted.

Moving Forward to a More Reliable System

Cowell Proposal to Lower the Tax Rates

• The rate for each income tax bracket would shift one percentage point, creating new brackets of 5%, 6%, 6.75%.

• The state sales tax rate would shift to 3.75%.

Current and Proposed Sales Tax Rates

State Local Combined Rate

Current Scheduled Rate after 7/1/11 4.75% 2.0% - 2.25% 6.75% - 7.0%

Income Tax Rates

6.0% 7.0% 7.75%

Single $0 - $12,750 $12,750 - $60,000 >$60,000

Head of Household $0 - $17,000 $17,000 - $80,000 >$80,000

Married Filing Jointly $0 - $21,500 $21,250 - $100,000 >$100,000

Moving Forward to a More Reliable System

The proposal is to include:

• Entertainment

• Repairs and Storage

• Property Services

• Support

• Personal Care Services

Keeping North Carolina Competitive as a State

These services are typically taxed in other states and would not lead to a competitive disadvantage.

Corporate tax rate = 6.9%

• 65% of corporate tax returns had no net taxable income.

• Business tax credits and incentives cost $277 million in 2009-2010.

Corporate Income Tax

Cowell Proposal to Lower the Tax Rate

• Shift to a combined reporting standard for determining corporate income.

• Eliminate credits and incentives that have not been proven to work.• Lower the tax rate to 5.9%.

“Leadership is about disappointing your (constituents) at a rate they can absorb.”

Role of Leadership in Solving the Big Problems

- Marty Linsky

Source: “Disappoint Your Own People at a Rate They Can Absorb,” The Washington Post, 10/26/2010

Next Steps

As State Treasurer, I will:

• Be a leader on the issue

• Use the influence of the State Treasurer’s office to ignite change

• Continue engaging financial and legislative leaders in the State

• Remain engaged in the debate as the session progresses

On the Road

I will be speaking across the State on this topic over the next several months.

A New Year, New Opportunities

2011 Call to Action

Look boldly toward the future, and do what we know we need to do.

Together, we can make 2011 the year of turning critical new year’s resolutions into action.