Broadening the Individual Income Tax Base -Starting with Federal AGI. Roby B. Sawyers, CPA, Ph.D. College of Management February 3, 2010

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1 Broadening the Individual Income Tax Base -Starting with Federal AGI Roby B. Sawyers, CPA, Ph.D. College of Management February 3, 2010

2 State Revenue Facts In the most recent fiscal year, over 56% of NC state tax revenue is generated from the personal income tax North Carolina relies more heavily on the personal income tax than most states with an income tax North Carolina relies more heavily on the personal income tax today than we used to North Carolina s top tax rate of 7.75% (before the surtax) is high compared to other states 2

3 Taxable Income vs. AGI as the Starting Point 29 states use federal adjusted gross income as the starting point in determining state taxable income 6 states including North Carolina use federal taxable income as the starting point 7 states don t have a state income tax Federal taxable income is a narrow base representing income after all federally allowed deductions both deductions for AGI and deductions from AGI 3

4 Taxable Income vs. AGI Primary differences: Federal taxable income is income after the standard deduction or sum of your itemized deductions (medical expenses, state and local taxes, mortgage interest, charitable contributions, etc.) Federal taxable income is income after personal and dependency exemptions 4

5 Taxable Income vs. AGI Note that regardless of the base used, the items of income subject to tax are the same. For example, capital gains are included in income under either approach A portion of social security benefits are included in income under either approach 5

6 Current Law vs. AGI Our current system of additions and subtractions is confusing to taxpayers and complex Moving to AGI as the starting point broadens the income tax base and provides a less complex tax form for taxpayers (you could eliminate many of the additions and subtractions) AGI is also a less volatile base than taxable income Broadening the base allows for tax rates to be reduced without a loss of tax revenue 6

7 What would it mean? A few adjustments would still be required: Legally obligated to exempt interest from federal obligations Legally obligated to exempt certain retirement benefits under the Bailey decision To avoid double-tax, would allow deduction for state and local tax refunds included in federal AGI 7

8 What would it mean? Social security benefits would be subject to North Carolina income tax to the same extent that they are subject to Federal tax Taxpayers would not receive deductions for mortgage interest, charitable contributions and other itemized deductions 8

9 Taxing Social Security Benefits The federal government began taxing a portion of social security benefits in Depending on the taxpayer s other income, up to 50% of social security benefits was originally subject to tax In 1993, the maximum amount subject to tax was increased to 85% for higher-income beneficiaries 9 Why 85%? About 85% of the average social security benefit represents an amount in excess of that contributed by the average worker

10 Taxing Social Security Benefits Only 25% of social security beneficiaries pay any tax liability on their benefits Over 80% of taxable social security benefits are reported by taxpayers with over $50,000 of adjusted gross income If you tax social security benefits to the same extent as the federal government, you are only taxing a small percent of beneficiaries receiving social security benefits 10

11 Itemized Deductions Only 37% of taxpayers in the U.S. itemize their deductions (Most take the standard deduction) High-income taxpayers are more likely to itemize than low-income taxpayers The largest itemized deductions claimed are for mortgage interest, state and local taxes and charitable contributions 11

12 What do other states do? A little bit of everything! states exempt all social security income from tax while 15 tax some portion of social security benefits 34 states allow some type of standard deduction All states allow either a personal exemption or credit to adjust tax liability for family size 34 states allow itemized deductions sometimes following federal rules and sometimes with their own limitations Seven states have a flat tax rate

OVERVIEW OF INCOME AND FRANCHISE TAX AND APPORTIONMENT. Senate Finance, March 10, 2015 Jonathan Tart, Fiscal Research Division

OVERVIEW OF INCOME AND FRANCHISE TAX AND APPORTIONMENT Senate Finance, March 10, 2015 Jonathan Tart, Fiscal Research Division Personal Income Tax Calculation 2013 Legislation eliminated many deductions