2021-2022 Budget Finance Provisions
This tax season, many North Carolinians will notice changes in their tax bills. That is because of the state budget enacted last year, which, among other things, increases the standard deduction and makes further changes to the state’s corporate and franchise tax rates. Senate Bill 105: 2021 Appropriations Act, which was signed into law November 18 by Governor Roy Cooper (D), continued a trend for North Carolina financial policy that began in 2013 when the newly elected Republican majority in the North Carolina General Assembly first lowered the state’s individual income tax rate.
With the adoption of the new state budget, North Carolina became the 12th state to enact income tax reductions in 2021. The bill cut the state’s flat individual income tax rate from 5.25 to 4.99 percent, beginning January 1, 2022. That rate will then be reduced further each biennium until it reaches 3.99 percent in 2027. If no other state adjusts their flat income tax rates, North Carolina will tie with Ohio for the fourth-lowest flat tax rate in the nation.
The budget also lowered the state’s corporate income tax rate. Only two states in the nation, South Dakota and Wyoming, levy no corporate income tax at all. Republican legislators intended for North Carolina to be the third, and enacted a schedule to phase out the corporate income tax altogether. North Carolina already has the lowest in the nation at 2.5 percent. It will be reduced to 2.25 percent in 2025, 2 percent in 2026, 1 percent in 2028, and zero by 2030. Although the Governor signed the measure, his spokesman issued a statement before the finance provisions were passed out of the legislature, saying the “last thing we need is more sweeping tax breaks for corporations.”
There are additional reforms to taxes that businesses in North Carolina pay. Beginning in 2023, the state will reduce the franchise tax liability for many businesses and allow them to remit based on their state-apportioned net worth, instead of the current system which calculates liability under three different bases and requires remittance based on the highest duty.
Senator Paul Newton (R-Cabarrus) who chairs the Senate Finance committee, applauded the budget’s tax cuts on the Senate floor, saying “we have consistently collected more from taxpayers than we need to operate a sound state government. This bill recognizes that and will allow taxpayers to keep more of their hard-earned money while keeping North Carolina on solid financial ground.” Some Democrats in the legislature opposed the tax cuts, arguing that the state has not spent enough in recent years on public schools and infrastructure.
A key part of the negotiations on finance policy that won support from Democrats was targeted relief to lower-income households with a $500 increase in the income-tested child tax deduction and an expansion of families eligible to receive the deduction. The bill also raises the standard deduction by $2,000 for single filers, and by $4,000 for married couples.
