North Carolina voters have lowered the limit on state personal and corporate income tax rates.
Voters in November approved a constitutional amendment to reduce the state’s tax cap from 10 percent to 7 percent.
North Carolina’s current personal income tax rate is 5.499 percent, which is 33 percent less than the new cap.
The new cap is below historical tax rates in the state. Before 2014, North Carolina had a progressive personal income tax system with tax rates of 6 percent, 7 percent, and 7.75 percent.
The state’s income tax cap was set at 10 percent in 1936 for both personal and corporate income taxes.
A Series of Tax Cuts
In 2014, North Carolina replaced its progressive personal income tax with a flat income tax. The single tax rate was initially 5.8 percent. In 2017, the rate was automatically reduced to 5.5 percent because the state met several revenue triggers.
The state also reduced the corporate income tax rate from 4 percent to 3 percent as of January 1, 2017. North Carolina now has the lowest corporate tax rate of any state that imposes such a tax, according to the Tax Foundation.
The tax rates will fall further on Jan. 1, 2019, to 5.25 percent on personal income and 2.5 percent on corporate income.
Limiting Government Growth
In 2017, the North Carolina Senate voted to propose lowering the income tax cap to 5.5 percent, matching the current personal income tax rate, but the legislation did not pass in the state House of Representatives. The legislature then voted to present a modified version with a cap of 7 percent.
By lowering the state’s tax cap, voters indicated they want to limit the growth of state government, says Bob Luebke, director of policy at the Civitas Institute.
“North Carolina voters sent a strong message,” said Luebke. “The electorate said they don’t want state government to keep growing. They want government to prioritize and live within its means, just like all households in North Carolina must do.”
‘A Nonpartisan Issue’
North Carolina voters view the tax cap as a nonpartisan issue, says Luebke.
“The October Civitas Poll found 69 percent of registered Republicans, 52 percent of ‘Unaffiliated,’ and 37 percent of Democrats supported the tax cap amendment,” said Luebke.
Voters approved the November measure by 57 percent to 42 percent.
Though the tax cap is not as low as the state Senate originally proposed, approval of the 7 percent cap was a positive development, says Luebke.
“Overall, the amendment is good news for North Carolina,” Luebke said. “It provides a check on state government and tells businesses and working families why North Carolina remains a great place to live and work.”
Joe Barnett ([email protected]) is a research fellow with The Heartland Institute.
Matthew Glans, “Research & Commentary: Income Tax Caps Help Restrain State Spending,” The Heartland Institute, July 18, 2018: https://heartland.org/publications-resources/publications/research–commentary-income-tax-caps-help-restrain-state-spending