This year North Carolina joined the growing number of states considering major changes to its tax system. The North Carolina Tax Fairness Act, introduced in May by Senate President Pro Tempore Phil Berger, lowers both personal and corporate income taxes, cuts the franchise business tax, abolishes the death tax, and lowers the sales tax rate while broadening the tax base.
Lowering personal and corporate income taxes could dramatically improve North Carolina’s economy and generate new jobs. According to a study published by the North Carolina-based John W. Pope Civitas Institute, tax reforms similar to the current proposal could have gained North Carolina an estimated 217,000 to 378,000 jobs over the past decade. The proposal would lower the personal income tax rate to a flat 4.5 percent, down from a top bracket of 7.75 percent. Corporate tax rates would be reduced from 6.9 percent to 6 percent while changing how the tax is calculated.
The nonpartisan Tax Foundation notes personal and corporate income taxes are generally considered the most destructive levies because economic growth arises from production, innovation, and risk-taking, which are stunted when government takes dollars away from businesses and individuals. Studies also show corporate income taxes place a disproportionate burden on low-income households.
To cover the revenue lost through the income tax reductions, the plan would apply a 6.5 percent combined state and local sales tax to several products not currently covered and would increase the sales tax on groceries, which is currently a 2 percent local tax, up to the combined sales tax of 6.5 percent.
Berger’s proposal also would reduce the franchise business tax and eliminate the state’s estate tax. Reducing the franchise tax and eliminating the estate tax will improve North Carolina’s economic competitiveness by removing a double taxation of businesses and individuals.
High income and business taxes deter economic development by discouraging higher-income-earners and new capital from moving into a state, remaining there, or investing their money. This tax reform plan would improve North Carolina’s economic competitiveness by leaving more money in the pockets of the state’s citizens and businesses to spend, save, and invest.
The following articles examine state tax reform from multiple perspectives.
Ten Principles of State Fiscal Policy
http://heartland.org/policy-documents/ten-principles-state-fiscal-policy
The Heartland Institute provides policymakers and civic and business leaders a highly condensed, easy-to-read guide to state fiscal policy principles. The principles range from “Above all else: Keep taxes low” to “Protect state employees from politics.”
Research & Commentary: Franchise Taxes
http://heartland.org/policy-documents/research-commentary-franchise-taxes
Heartland Institute Senior Policy Analyst Matthew Glans examines franchise taxes and explains how different states are approaching reform. Lowering or eliminating franchise taxes improves a state’s competitiveness by eliminating a double tax on business, Glans notes.
Research & Commentary: Estate Taxes
http://heartland.org/policy-documents/research-commentary-estate-taxes
Matthew Glans of The Heartland Institute examines estate taxes, their effects on the economy and investment, and current proposals for reform. Glans argues estate taxes are a form of double taxation that stifles investment and entrepreneurship, reduces economic growth, discourages savings, increases the cost of capital, raises interest rates, and brings relatively little revenue. Lowering the estate tax or eliminating it completely would create jobs and promote savings and investment while reducing penalties on individuals who save for the next generation.
Rich States, Poor States
http://heartland.org/policy-documents/rich-states-poor-states-alec-laffer-state-economic-competitive-index
The fifth edition of this publication from the American Legislative Exchange Council and authors Laffer, Moore, and Williams offers both individual-state and comparative accounts of the negative effects of income taxes.
Critics of North Carolina Tax Reform Miss the Point
http://taxfoundation.org/article/critics-north-carolina-tax-reform-miss-point
Elizabeth Malm of the Tax Foundation addresses some of the criticisms of the proposed tax reforms in North Carolina. Malm argues that although economic growth under the proposed plan won’t be instantaneous, a “continued, consistent commitment to a system that won’t discourage the very things that will move North Carolina’s economy forward will most definitely benefit the state in the long run.”
North Carolina Tax Reform Options: A Guide to Fair, Simple, Pro-Growth Reform
http://heartland.org/policy-documents/north-carolina-tax-reform-options-guide-fair-simple-pro-growth-reform
Writing for the Tax Foundation, Joseph Henchman and Scott Drenkard offer a menu of choices for North Carolina legislators for tax reform that would ensure their state builds on its recent growth and creates an attractive environment for investment, entrepreneurs, and talented workers.
More Jobs, BIGGER Paychecks: A Pro-Growth Tax Reform for North Carolina
http://heartland.org/policy-documents/more-jobs-bigger-paychecks-pro-growth-tax-reform-north-carolina
The Civitas Institute examines North Carolina’s tax system and proposes a pro-growth tax reform plan, including income tax elimination. “Any tax reform in North Carolina should increase the after-tax income for the next dollar earned and raise the reward to work. Tax policies that increase the incentive to produce, invest and innovate attract industries and entrepreneurs. Increased economic growth, income and employment follow. Tax reform should reduce the penalty from additional work, savings, and investment and subsequently encourage increased work effort, increased wages, increased savings, and greater investments (and subsequently, greater capital accumulation),” the report states.
The Corporate Income Tax: Repeal, Not Reform
http://heartland.org/policy-documents/corporate-income-tax-repeal-not-reform
In this 2011 Research Spotlight from the John Locke Foundation, Roy Cordato argues corporate taxes represent additional layers of taxation and make the common mistake of assuming corporations do not pass on the cost of taxes to their customers: “The corporate income tax imposes a second and even a third layer of taxation on people’s incomes and is hidden, dishonest, and inconsistent with informed decision making in a free and democratic society.”
North Carolina Tax Fairness Act Calculator
http://interactive.taxfoundation.org/north_carolina/
This interactive calculator from the Tax Foundation estimates how changes to the state income and sales taxes as part of the North Carolina Tax Fairness Act will affect taxpayers in that state. It does not attempt to estimate the effects of other changes included in the bill, such as to the estate tax, corporate income tax, or franchise tax.
Personalizing the Corporate Income Tax
http://heartland.org/policy-documents/personalizing-corporate-income-tax
In a Fiscal Fact article, Gerald Prante and Scott Hodge discuss the effect of corporate income taxes on individual households. They write, “Examining income groups, Chamberlain and Prante found that low-income households pay more in corporate income taxes than they pay in personal income taxes. Geographically, households in largely urban congressional districts and metropolitan areas bear a disproportionate share of corporate income taxes today and, thus, would receive a significant boost in living standards if the corporate tax burden were reduced.”
Nothing in this Research & Commentary is intended to influence the passage of legislation, and it does not necessarily represent the views of The Heartland Institute. For further information on this and other topics, visit the Budget & Tax News Web site at http://news.heartland.org/fiscal, The Heartland Institute’s Web site at www.heartland.org, and PolicyBot, Heartland’s free online research database, at www.policybot.org.
If you have any questions about this issue or The Heartland Institute, contact Heartland Institute Senior Policy Analyst Matthew Glans at 312/377-4000 or [email protected].
Matthew Glans joined the staff of The Heartland Institute in November 2007 as legislative specialist for insurance and finance.
