Personal Income & Sales Tax Reductions:
Important to our State's Businesses?

As the North Carolina General Assembly begins to lay out tax policy changes for consideration, our Chamber wants to engage businesses in the dialogue around critical decision-making that will impact their capacity for growth and job creation. State leaders and policy makers appear already at odds over potential reductions to the state sales tax rate and top marginal personal income tax rate. The Governor's state budget proposal would not allow reduction in state and personal income tax rates. The House leadership has indicated that its budget proposal, which may be out as soon as next week, would also maintain these tax rates at the current level. The Senate, however, has indicated that it favors a proposal that would rollback the state sales tax rate by a quarter penny (saving individuals and businesses roughly $200 million) and the top personal income tax rate by 0.25 percent (from the current 8.0 percent rate to 7.75 percent).

Because many small businesses, including sole proprietorships, partnerships, limited liability companies, and subchapter-S corporations, pay taxes under the personal income tax (PIT) structure as opposed to the corporate tax structure, our Chamber understands that potential changes to PIT rates can represent an important small business issue. And just like individuals businesses also pay sales taxes on purchases that increase their cost of doing business. As the leading advocate for North Carolina businesses both large and small, our Chamber wants to hear from you (see the member survey question on left-handed side of this e-newsletter).

Small Business Growth is Vital to our State Economy
Small businesses represent the backbone of our state's economy. Roughly 95 percent of North Carolina businesses employee fewer than 100 employees, and roughly 75 percent employ less than 10. Changes in personal income tax rates can have a widespread impact on the investment capacity, productivity and profitability of small businesses; therefore, personal income tax reductions can have a significant impact on our state's economy. While our Chamber is monitoring numerous tax bills that have been filed by lawmakers on behalf or our members, we are interested in hearing from our members about North Carolina's 8% top personal income tax rate, which is among the highest in the country and higher than most of our neighboring states. (Since it is already an item of contention between the state House and Senate, it is extremely important to know where North Carolina's business community stands on the issue.)

Background:
Faced with a budget crisis, the General Assembly passed increased the state sales tax rate by a half-cent and top personal income tax rate by .50% during the 2001 legislative session. The tax increases as passed were intended to be temporary, scheduled to sunset (or end) in 2003. The tax increases did not roll back in 2003, however, as the General Assembly extended the sunset in 2003 and again in 2005 due to an ongoing revenue shortfall.
Last year, during the 2006 legislative session, state lawmakers reached an agreement to partially roll back the temporary tax increases and as a result decreased the state sales tax rate by one-quarter-cent and the personal income tax rate by .25% (from 8.25% to 8.0%). Last session, the House and Senate agreed on the sales tax reduction, but the income tax reduction was an issue of contention last year too.

How North Carolina Stacks Up:
North Carolina state sales tax and personal income tax rates are due for another reduction this year back to 2000 levels. If the tax rates decrease as scheduled, it will mean another quarter-penny reduction in the state sales tax rate and a .25% decrease in the personal income tax rate to 7.75%.

North Carolina's personal top marginal personal income tax rate is the 8th highest in the nation. The Small Business & Entrepreneurship Council's 2006 "Small Business Survival Index" ranks North Carolina 40th among the 50 states and District of Columbia in terms of public policy climate for small business and entrepreneurship.

As small business make up the largest portion of our state's business community, our Chamber wants to hear from our members how important personal income and sales tax rates are to you. It is - after all - our Chamber's mission to make sure that North Carolina is and remains the best state in the country in which to do business and the most competitive state for jobs. Most new jobs are created by businesses already operating in our state. In order to help us maximize your competitive advantage, let us hear from you!