BRADENTON, Fla. - Moody's Investors Service said new tax reform measures enacted by triple-A rated North Carolina are substantial but manageable.
Gov. Pat McCrory signed comprehensive tax reform into law late last month implementing new flat personal and corporate income-tax structures while ending many state sales tax exemptions, such as the annual sales tax holiday on school supplies.
The reforms cut individual income tax rates from the current three brackets of 6%, 7%, and 7.5% to a single flat rate of 5.8% in 2014 and 5.75% in 2015. Corporate income tax rates will be reduced from 6.9% to 6% in 2014 and 5% in 2015.
"While the magnitude of the tax rate reduction is substantial, the overall budgetary impact is manageable," Moody's analyst Kimberly Lyons said in an Aug. 22 comment. "The income tax cuts are largely offset by broadening the sales tax base and eliminating several sales tax exemptions."
The sales tax, the second-largest revenue source for the state, was expanded to include electricity, piped natural gas, and some service contracts. A number of refunds, credits, and exemptions were repealed.
The net effect of the tax reform is estimated by the state to reduce general fund revenue by 1% in the 2013-2015 biennium, and 3% in the fiscal 2015-2017 biennium.
"According to legislative forecasts, the enacted tax changes will cost the state $2.4 billion over a five-year period," Lyons said. "Given the reform measures, overall revenues are still increasing and the state balanced the 2013-2015 biennium budget with a projected surplus in spite of the net revenue decrease from the tax change."
In signing the legislation, McCrory said he believed that it would "prove to be critically important to growing North Carolina's economy and getting people back to work. This tax reform package is fiscally responsible and provides reasonable revenue growth every year to meet the state's budget needs."