North Carolina Secures Solid Upper Hand on Virginia with Announcement of Major Tax Reforms

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Great news in the world of tax reform: This week, the North Carolina legislature approved long-sought-after, major tax-reform legislation. The bill is now on its way to Governor Pat McCrory’s desk for certain approval. As part of this measure, the current state income tax structure, with the highest tax bracket of 7.75 percent, will be reduced across the board to a flat 5.8 percent in 2014 and 5.75 percent in 2015. Similarly, the corporate tax will be reduced from its current 6.9 percent to 6 percent in 2014 and 5 percent in 2015. Further reductions may follow in 2016 and 2017, based on revenue performance. In addition, the estate tax is also being eliminated. To help offset the reduced revenue, modifications were made to the sales tax structure as well as several other items.

These reforms are hard-won and rightfully touted as a means to attract more business investment and wealth migration to the state. According to ChiefExecutive.net, North Carolina already holds third place in the “best states for business” rankings. These reforms will ideally sweeten the pot for the coveted position of first or second (currently held by Texas and Florida, respectively).

This is all exciting news in North Carolina, as businesses have already announced planned expansions. However, it is not good news at all for North Carolina’s neighbor, the Commonwealth of Virginia. Between 1992 and 2010, Virginia lost $2.39 billion of its taxpayers’ adjusted gross incomes directly to the state of North Carolina. North Carolina’s new legislation could widen that gap even further.

With 2.6 million residents (about a third of the state’s population), Northern Virginia (particularly Fairbanks County) is the most populous region of the state and contains seven of the twenty highest-income counties in the nation.  Yet Fairbanks County alone lost $6.03 billion in annual AGI just to its neighboring counties. Why the exodus of wealth? One key reason: Fairfax County has one of the highest tax rates in Northern Virginia. Now, leaders in Alexandria are hitting taxpayers with the biggest property tax increase in the region,

On the state level, various plans for tax reform are part of the campaign platforms of all three 2013 Virginia gubernatorial contenders. For example:

  • Terry McAuliffe (D) is looking to reduce or eliminate the Business Professional Occupational License Tax, the Machinery and Tools Tax, and the Merchants’ Capital Tax. He is also looking for other revenue sources (i.e., more taxes).
  • In addition to Terry McAuliffe’s tax reduction areas, Robert Sarvis (L) stated he will “consider” a plan to eliminate the personal income tax and reform the property tax structure.
  • Only current Attorney General Ken Cuccinelli (R) has laid out a specific plan to address personal income tax reduction (a gradual decrease from 5.75 percent to 5 percent over the next four years), as well as a reduction of the corporate income tax (from 6 to 4 percent).

Unfortunately, Cuccinelli has other issues with which to contend. Governor Bob McDonnell, a fellow Republican, confronts ever-mounting ethics scandals. Cuccinelli must steer clear of the fray and hope that voters won’t make any “guilt by association” decisions in the voting booth this fall. He has subsequently added stronger ethics laws to his platform, as well as opened a statewide investigation into the governor’s financial dealings.

If the Commonwealth of Virginia intends to reduce the tax gap with North Carolina and promote revenue growth in the state, all three candidates must closely examine and address Virginia’s cumbersome tax policies. We will see which tax platform voters prefer on Election Day.