What NC budget means for Tarheels

By Matt Caulder, NC Capitol Connection, September 16, 2015.

When lawmakers make sweeping changes to the tax system, like the ones included in the budget set to be approved this week, many state residents wonder what it means for their own personal finances.

Savings to taxpayers broken down

The change that affects the most people will be a reduction in taxes, starting in 2016, first with the increase to the standard deduction, and second in 2017, when the income tax rate is dropped by a quarter of a percentage point.

For example, take Tim and Tonya Tarheel, a North Carolina couple with two children, Tim Jr. and Tiffany. Together Tim and Tonya make $100,000 and they are wondering how the tax changes will affect them.

While their federal tax liability of $13,110, less $2,000 for their tax credit for Tim Jr. and Tiffany, would not change, they would see savings in their state taxes.

Under the new plan in the 2016 tax year, the state standard deductions will increase for married couples filing jointly by $500.

Not taking into account itemized deductions and any credits, save the $100 credits for each of their children, the Tarheels will have an overall tax liability of $4,658.75, nearly $30 less than in 2015.

The Tarheels will see more savings in the 2017 tax year. Then they will have a tax liability of $4,446.66, more than $210 less than in 2016 and $240 less than in 2015.

Imagine that Tim has a brother Tyler who also makes $50,000, but Tyler is not married and has no children. Tyler had a state tax liability of $2,443.75 in 2015 and with the changes made to the tax code in 2016 he will have a tax liability of $2,429.38, a nearly $15 reduction from his 2015 liability.

In 2017 Tyler will have a state liability of $2,323.33, a $106 reduction from his 2016 liability and a more than $120 reduction from his 2015 tax liability.

While taxpayers may see an increase when sales taxes are extended to auto or appliance repairs, the budget also includes unlimited deductions for medical expenses and charitable contributions.

Also, for the increase in the sales tax base to overtake the savings seen from the income tax reduction, the Tarheels would have to spend $5,000 on expenditures that fall under the new sales tax collections.

In other words, though Tonya will eventually find the sales tax added on when she takes her car to the shop, the Tarheels will have no limits on deducting their medical bills and charitable contributions.

It’s also important to remember that shifting the burden to sales taxes will boost the state’s economy, because such consumption taxes are less harmful to growth.

“The tax reforms advance North Carolina further down the road to a consumption-based tax system by lowering income tax rates and broadening the sales tax base,” said Brian Balfour, economist and director of policy for the Civitas Institute. “On net, the tax changes are projected to result in roughly $400 million worth of tax savings over the next two years. That is a significant plus for North Carolina families and our economy.”

The budget basics

State leaders are voting on the budget this week as the end of the third continuing resolution to keep the state running comes this Friday.

Included in the $21.7 billion spending plan are raises for starting teachers from $33,000 to $35,000, bonuses for state employees and a 3 percent raise for sworn highway patrol employees.

But affecting everyday citizens in the budget are changes to the state tax system that make up the second major overhaul in three years following the tax reforms of 2013.

In 2017, the state personal income tax rate will fall from 5.75 percent to 5.499 percent.

Also, the state standard deductions will increase by $500 for married taxpayers, filing jointly, to $15,500, in 2016.

Deductions would also increase by $400 for heads of household to $12,400, and single taxpayers and married couples filling separately deductions will increase $250 to $7,750, in 2016.

As mentioned above, starting this year, retroactively to January 1, unlimited medical, dental and charitable deductions will be allowed under the tax code.

Under the budget many repair, installation and service industries – such as vehicle and appliance repair – will be taxed.

Veterinary and advertising services are not included in the expanded tax base, a proposal that was floated earlier.

http://nccapitolconnection.com/2015/09/16/what-nc-budget-means-for-tarheels/