A New Year, Old Challenges Tax Reform For the State of North Carolina, tax reform is key includes several old challenges. It is time to take bold action to address these outstanding challenges.

Current General Fund Revenue Baseline Revenue Growth, FY to FY NOTE: The last column represents the current forecast baseline estimate. Source: Fiscal Research Division, A Staff Agency of the North Carolina General Assembly.

Increasing Rates Source: Fiscal Research Division, A Staff Agency of the North Carolina General Assembly.

Moving Forward to a More Reliable System Average State General Fund, FY to FY

Moving Forward to a More Reliable System Eliminate Complexity in the System Remove exemptions and credits that only individuals with tax accountants can take advantage of and understand. Federal and State deductions and credits reduce State revenue by $2.5 billion. Federal itemized deductions reduce revenue by $1.3 billion. 38 state credits and deductions reduce revenue by $1.2 billion. Suggestion Allow certain itemized deductions (mortgage and charitable donations), but cap the amount deducted.

Moving Forward to a More Reliable System Cowell Proposal to Lower the Tax Rates The rate for each income tax bracket would shift one percentage point, creating new brackets of 5%, 6%, 6.75%. The state sales tax rate would shift to 3.75%. Current and Proposed Sales Tax Rates StateLocalCombined Rate Current Scheduled Rate after 7/1/114.75%2.0% %6.75% - 7.0% Income Tax Rates 6.0%7.0%7.75% Single$0 - $12,750$12,750 - $60,000>$60,000 Head of Household$0 - $17,000$17,000 - $80,000>$80,000 Married Filing Jointly$0 - $21,500$21,250 - $100,000>$100,000

Moving Forward to a More Reliable System The proposal is to include: Entertainment Repairs and Storage Property Services Support Personal Care Services Keeping North Carolina Competitive as a State These services are typically taxed in other states and would not lead to a competitive disadvantage.

Corporate tax rate = 6.9% 65% of corporate tax returns had no net taxable income. Business tax credits and incentives cost $277 million in Corporate Income Tax Cowell Proposal to Lower the Tax Rate Shift to a combined reporting standard for determining corporate income. Eliminate credits and incentives that have not been proven to work. Lower the tax rate to 5.9%.

“Leadership is about disappointing your (constituents) at a rate they can absorb.” Role of Leadership in Solving the Big Problems - Marty Linsky Source: “Disappoint Your Own People at a Rate They Can Absorb,” The Washington Post, 10/26/2010

Next Steps As State Treasurer, I will: Be a leader on the issue Use the influence of the State Treasurer’s office to ignite change Continue engaging financial and legislative leaders in the State Remain engaged in the debate as the session progresses On the Road I will be speaking across the State on this topic over the next several months.

A New Year, New Opportunities 2011 Call to Action Look boldly toward the future, and do what we know we need to do. Together, we can make 2011 the year of turning critical new year’s resolutions into action.