This year NC taxpayers filed for the first time under the tax changes made by the Legislature in 2013 but mostly effective in 2014. Many lower-income people, those making less than about $80,000, paid the same, a little less or a little more income tax as under the 2013 rules. But because the withholding tables resulted in much lower withholding in 2014 than in 2013, many taxpayers owed for the first time. Others received much lower refunds than they did the prior year.
Complaints were loud and intense for a while. Politicians being politicians, they figured they needed to fix this problem and help most people receive a refund in the future. After all, 2016 is an election year. Instead of cutting tax rates or allowing more deductions the Legislature decided it could fool most of the people most of the time.
The “fix” or tricking taxpayers
Maybe I am a cynic but this is sure what it looks like. The Legislature passed House Bill 117, also known as Session Law 2015-259 (PDF). Starting in 2016, the law requires employers to withhold at a higher rate than the actual NC tax rate. This should cause more people to get a refund or get a larger refund. Voila, problem fixed.
Of course one could argue the Legislature is helping taxpayers who were confused by the more complex new NC-4 (PDF of withholding allowance form) and had less tax withheld than was proper. The fix to that would seem to be to make the law simpler and not cause smaller take home pay for almost everyone, even those who got the NC-4 right.
Example of the “fix”
Lets look at a simple example. Taxpayer Tom owed $2,000 for 2014 and had $1,900 withheld. Poor Tom has to pay another $100 with his 2014 tax return. For 2016 he owes $2,000 but he has $2,100 withheld. Now Tom is happy because he is getting $100 back. What really happened? He still owes $2,000 in total income tax before any payments. Because of the $100 refund, the NC Legislature hopes Taxpayer Tom is tricked into thinking 2016 was a good tax year while 2014 was a bad tax year.
So taking more money up front and then returning it later is a tax cut? Sadly, the NC Legislature will fool quite a few people with this ploy. So is tricking taxpayers part of the Legislature’s job?