Legislature revs up tax on car repair, other services

As a co-owner of Auto Pro in Arden, Jennifer Hartman sees a sales tax increase on car repairs as hurting customers more than her business.

They are the ones less likely to have options when things go wrong.

"They have to keep older vehicles. They can't afford a new car," Hartman said. "I deal with a lot of elderly people. That'll hit them real bad."

It's same for Randy Richards, owner of Precision International on Sardis Road in Candler.

"It's a middle class and lower-middle class tax," Richards said. "If you're upper class and you're driving a new car, you're not paying for repairs" because they aren't needed or are covered under warranty.

Tax changes like the car repair tax approved by the General Assembly as part of a state budget adopted earlier this month will slightly increase taxes paid by many lower income North Carolinians, according to an analysis by a liberal group, while those in upper income brackets will get significant tax breaks.

"Our tax system is becoming even more upside down in that those who earn the least are paying a larger share," said Cedric Johnson, a policy analyst at the N.C. Justice Center's Budget and Tax Center.

But a conservative commentator said people at the bottom of the income scale will benefit from improvements in the state's economy he says will result from the lower amounts most taxpayers will pay.

"It's those lower income households and individuals who are in most need of job opportunities" that will result from tax cuts, said Brian Balfour, director of policy at the conservative Civitas Institute in Raleigh.

A shifting burden

The 2015-16 budget bill Gov. Pat McCrory signed Sept. 18 continues an effort by Republicans who control the legislature to lower personal income and corporate tax rates while increasing sales tax revenue.

The bill cuts the personal income tax rate from 5.75 percent to 5.499 percent as of 2017 and locks in an annual drop in the corporate tax rate that will see it fall to 3 percent the same year, down from 6.9 percent a few years ago. Legislators also increased the standard deduction, the amount of income not subject to tax for those who do not itemize deductions, and restored a deduction for health care expenses.

On the other side of the ledger, the budget bill extends the sales tax to maintenance, repair and installation of items whose sale is already subject to the tax. It also raises many drivers license, registration and related fees by roughly 30 percent.

A little more than half of the additional money expected from the sales tax expansion will be dispersed to the state's more rural counties and their municipalities. Legislators agreed to the plan following Senate leaders' unsuccessful attempt to reduce the amount of sales tax dollars going to the urban areas.

Buncombe County's share of sales tax proceeds will be practically unchanged while many smaller Western North Carolina counties will see more money.

Among the major types of individual purchases affected by the sales tax change are car repairs, installation of an appliance or repairs to a computer. The change could also affect bigger ticket items like the installation of a mobile home, but the state Department of Revenue is still working out the details of what will be covered and what will not.

Car repair businesses are already required to charge sales tax on parts they sell as part of fixing your car, but under current law, they don't charge sales tax on the labor involved.

That changes March 1, when both parts and labor will be subject to the tax. People at several garages said that labor makes up about half the cost of an average repair, so the change will effectively double the amount of sales tax people pay to get their car fixed.

With the sales tax rate at 7 percent in Buncombe County, a shop might charge $17.50 in sales tax on a $500 job today. After March 1, the customer's tax bill would be $35.

Most local shop owners and managers interviewed were at least mildly unhappy about the change, but none expected a drop-off in their business.

"I guess it doesn't matter so much to me as to the end user," said Bob Buchanan at Monteath's Auto Service in East Asheville.

"If the job needs to be done it needs to be done" and most people won't decide against a repair because expanding the sales tax will make it more expensive, he said. But, he added, "That could really stretch some budgets."

Ray Tennpenny, owner at Cox Auto Service in West Asheville, had a similar view.

"It's not going to affect me or any of us (repair shops). It's going to affect you guys," he said, referring to customers. "The bottom line is I'm going to make the same amount of money."

Richards with Precision International said taxing the cost of labor amounts to being just another tax.

The added expense could weigh into some decisions about whether to fix a vehicle or junk it, he said, but the impact on most people will be that they have a little less money to spend on something else.

"Conceivably, it could take some older cars off the road," he said. "If you're driving let's say a 12-year-old car (needing major repair work), is that going to make you decide to get rid of the car? Probably not, but over the long run is it going to hurt the average pocketbook? Yeah."

Who pays?

Most North Carolinians will see a net decrease in the total amount of sales and income taxes they pay as a result of tax changes in the budget bill, while some of the state's poorest citizens will pay more, according to figures compiled by the Budget and Tax Center.

The impact varies widely according to income, with those at the top of the scale seeing much more of a direct benefit than those in middle- and lower- income brackets.

The average person with an income in the bottom 20 percent of North Carolinians — that's those who make less than $20,000 a year — will pay $7 more a year in taxes once the changes are fully implemented than they do today, the center numbers say. People in the next highest 20 percent on the income scale, with between $20,000 and $34,000 in annual income, will save $10 a year.

By contrast, those with incomes of $90,000 to $184,000 a year will get an extra $181 in their pockets.

However, those numbers do not take into account the impact of higher Division of Motor Vehicles fees. The DMV changes will mean most of those in the lower 40 percent of the income scale who own a car will end up paying the state the more in taxes and DMV fees than they do today.

"The income tax changes that are in the (budget) just don't touch low- and middle-income taxpayers," Johnson said.

The amount of change for low-income people is small, but Johnson said it still matters, and the state should avoid making life more difficult for its poorest citizens.

"Every dollar counts when you're dealing with taxpayers who are at the bottom of the income ladder," he said.

Both Johnson and Balfour, the conservative analyst, say there are good reasons to expand the sales tax base. As the economy continues to become more service-oriented, that expansion covers more of the economy, reducing pressure to raise the sales tax rate and lessening discrimination between different types of economic activity, they said.

Johnson, however, says the problem is the General Assembly has not taken enough steps at the same time to keep the shift from falling most heavily on low-income taxpayers, who spend a larger proportion of their income on things subject to sales tax than the wealthy do.

"Where we are continuing to go wrong here in North Carolina is we're doing nothing in the tax code to address the fact that the sales tax is regressive," he said.

He also said cutting state government revenue will make it harder for the state to provide services like a good education or environmental protections that boost the economy and quality of life.

Legislative leaders disagree, saying the budget includes targeted investments and, as House Speaker Tim Moore said, "puts more money back into taxpayers’ wallets."

Balfour said the tax changes may indeed fall disproportionately on those with lower incomes. But he said cutting the income tax is among the steps state government can take that will do the most good to help the North Carolina economy.

The Budget and Tax Center figures come up short, he said, because they do not take into account the likelihood that incomes will rise because taxes are lower.

The personal income tax is the way many small business owners pay taxes on their profits, he said, and the state's income tax "serves as the biggest disincentive for business to move here."

By changing the tax code, he said, "You're going to alter people's behavior."

If a business owner has more money left over after paying his income taxes, "That's money that they are going to ... invest in expanding their business," Balfour said. That in turn will result in more jobs for other people, he said.

The income tax acts as a disincentive for people to make more, Balfour said. "The last thing you want to do is penalize investment and production. That's really what drives the economy," he said.

Tax changes

Picking up the tab

Here are figures from the N.C. Justice Center's Budget and Tax Center summarizing the way tax changes in the new state budget bill will affect people at different levels of income. They are derived from a database of information on North Carolina taxpayers maintained by the Institute on Taxation & Economic Policy. The figures do not include impacts from higher drivers license and vehicle fees.

Lowest 20 percent

Income range: $20,000 or less

Average income: $12,000

Average tax change: Will pay $7 more.

Second 20 percent

Income range: $20,000-$34,000

Average income: $26,000

Average tax change: $10 cut

Middle 20 percent

Income range: $34,000-$57,000

Average income: $44,000

Average tax change: $44 cut

Fourth 20 percent

Income range: $57,000-$90,000

Average income: $72,000

Average tax change: $74 cut

Next 15 percent

Income range: $90,000-$184,000

Average income: $122,000

Average tax change: $181 cut

Next 4 percent

Income range: $184,000-$423,000

Average income: $257,000

Average tax change: $420 cut

Top 1 percent

Income range: $423,000 and above

Average income: $1.06 million

Average tax change: $1,815 cut

Here is a summary of changes in state taxes and fees approved as part of the budget for the 2015-16 fiscal year that began July 1, along the with amount of money they will add or subtract from state revenue.

Personal income tax

--The income tax rate drops from 5.75 percent to 5.499 percent, effective in the 2017 tax year.

--Taxpayers can once again deduct medical expenses from their gross income, effective this year. The legislature had eliminated the deduction in 2013.

--The standard deduction, the amount of income taxpayers who do not itemize deductions can shield from taxation, goes from $15,000 to $15,500 for married couples and $7,500 to $7,750 for singles as of next year.

Impact. The changes will cost the state $117.3 million in the current fiscal year, rising to $719.8 million in FY 2017-18.

Sales tax

--The sales tax will be applied to the installation, maintenance or repair of objects that are subject to sales tax when they are sold, starting March 1.

Impact. The state will gain $44.5 million in revenue in the current fiscal year, rising to $159.5 million in FY 2016-17.

DMV fees

--The renewal fee for the standard drivers license, paid every eight years, rises from $32 to $40, effective Jan. 1.

--Most other license, registration and title fees go up by about 30 percent, also as of Jan. 1. Examples include the annual car registration fee, which goes from $51 to $66, and an application for a new car title, which rises from $40 to $52.

Impact. The state gets an additional $91.3 million in the current fiscal year and $217 million more in FY 2016-17.

Corporate income tax

--A 2013 law set up a scheduled to cut the corporate income tax rate, then at 6.9 percent, each year until it reached 3 percent if the amount of state revenue from all sources met certain targets. The new budget bill ensures that the cuts go into effect. The rate is 5 percent this year, will be 4 percent next year and 3 percent in 2017.

--Corporations will change the way they calculate their income over a three-year period beginning Jan. 1, further reducing the amount of tax the state collects.

Impact. The state loses $117 million in the current fiscal year and $372.4 million in 2016-17, rising to $627.3 million in FY 2018-19. About 85 percent of the impact comes from the tax rate cuts already scheduled.

Historic preservation

--The bill reinstates a tax credit given to people who renovate historic buildings, although the new credit is less generous than under previous state law.

Impact. The state loses $8 million annually once the credit goes into effect next year.

Municipal vehicle fee

--Cities and towns can increase the annual tax on vehicles from $5 to as much as $30 as of July 1 next year.

Impact. None to the state.

The good, the bad and the ugly: State budget has some of each