State income tax exemption on retirement plans proposed

(The Center Square) – House Republicans introduced legislation on Friday to eliminate state income taxes on government retirement plans.

House Bill 46 would amend the state statute to “make income received from a North Carolina state or local government retirement plan or a federal government retirement plan exempt from the state income tax.”

The bill is sponsored by Republican Reps. George Cleveland of Onslow County, Frank Iler of Brunswick County, Jon Hardister of Guilford County, and Donna McDowell White of Johnston County, and currently has two co-sponsors.

HB46 would strike language currently in law that references the state Supreme Court’s decision in Bailey v. State of North Carolina and other cases that provided tax exemptions for specific retirement benefits for government employees.

Those exclusions involve retirement benefits received from certain defined benefit plans, including the North Carolina Teachers’ and State Employees’ Retirement System; the North Carolina Local Governmental Employees’ Retirement System; the North Carolina Consolidated Judicial Retirement System; the Federal Employees’ Retirement System; or the U.S. Civil Service Retirement System.

The court ordered exemptions, which also included military retirements and benefits from state 401(k) and 457 plans, applied to retirees with five or more years of creditable service as of Aug. 12, 1989.

HB46 replaces the court imposed exemptions with any amount received from one or more state, local or federal government retirement plans, while allowing the same exemption for beneficiaries of a retired member of the U.S. Armed Forces who served at least 20 years or medically retired.

There is no fiscal note attached to the bill, and the potential impact on state revenues is unclear.

North Carolina exempts all Social Security retirement benefits from income taxes, while other forms of retirement income is taxed at a flat rate of 4.75% for 2023.

Lawmakers have reduced the state’s individual income tax rate from about 7% a decade ago to the 4.75% rate that took effect in 2023. Further reductions approved by the General Assembly in 2021 will cut the rate to 4.6% in 2024, 4.5% in 2025, 4.25% in 2026, and 3.99% in 2027, according to the North Carolina Department of Revenue.