It is a taxing business to bring about fiscal policy reform. However, in the context of an unemployment rate hovering around 10 percent, North Carolina needs to consider how to defibrillate a stagnant economy and usher in new jobs to the state. The most obvious way to encourage business is to create an environment that is more profitable for companies to work, that is, cut taxes that reduce companies’ willingness to conduct business and grow in North Carolina.
North Carolina has some of the highest tax rates in the Southeast, a fact that certainly doesn’t help it emerge from the depths of recession. One of these business-discouraging taxes, the corporate income tax (CIT), is prohibitively high and perforated with loopholes and incentives carved out by lobbyists representing the privileged and politically-connected corporations in our state. If the base of the corporate income tax were broadened, holes plugged, and tax rates lowered, North Carolina could address its economic woes in a revenue neutral way.
Weighing in at 6.9 percent of net income, North Carolina has undeniably the highest CIT in our region, and it used to be even higher. In 1991, the CIT rate stood at 7.75 percent of net income, but was brought down in 1999 to the more bearable, yet still comparatively uncompetitive rate it is today. With neighbors like South Carolina (5 percent CIT), Mississippi (3 – 5 percent CIT), and Florida (5.5 percent CIT), it is disadvantageous for North Carolina to keep CIT rates so high.
The revenue generated by the CIT has diminished throughout the last thirty years. Whereas in FY 1970-71, the CIT composed 12 percent of General Fund revenue, in FY 2008-9 it made up only 5 percent of the fund. A considerable portion of the declining revenue of this fund has to do with the General Assembly’s recent affinity for tax breaks and incentives (the majority of major tax incentives were instituted after 1998) for industries of their choosing.
The total amount of revenue lost to tax credits in 2005 was $97.8 million. The overwhelming majority of these tax credits went to the top 217 companies earning more than $10 million. Of the $97.8 million lost in revenue to tax incentives, this handful of top-earning companies was spared $81.6 million in taxes. Only a few years later, during FY 2009-10, the total amount lost in tax credits rose to $277 million.
The laundry list of tax credits available to select industries is extensive. The FY 2009-10 list includes tax credits for the Film Industry ($22.5 million), cigarette manufacturing, computer manufacturing facilities, Low-income housing ($41.6 million), mill rehabilitation ($6 million), renewable fuel facilities (200K), historic site rehabilitation ($8 million), and plenty others. Additional programs like the One North Carolina Fund doles out millions more in tax credits for a variety of different structural maintenance projects, renovation, and purchases of equipment, so long as it falls under the legislated guidelines.
Targeted tax incentives are inequitable, disruptive of the free market, and allow tax rates to remain aberrantly high. Incentives are often granted to larger corporations with connected lobbyists who can curry favor with legislators. This is simply unfair for those firms who don’t have the resources to hire an expensive lobbying team to charm state legislators. Additionally, the government creates artificial demand for certain industries by creating tax havens for them. If tax rates were equal and universally low, consumer preferences could again reign surpreme in determining which firms are most economically efficient, rather than having government favoritism provide a competitive edge for certain companies. This would provide a more fair and reasonable tax rate for all businesses and would stimulate economic growth.
The shock therapy that North Carolina’s economy needs can be found in part in addressing the steep tax rate of the CIT. By considering a more fair, and overall lower corporate income tax CIT, with a broadened base and lower tax rate, it could produce the jumpstart our state has been looking for. This would cut a lot of the lobby influence in Raleigh, create a universally stimulating environment for job growth, and do justice to those smaller firms that don’t have any professional schmoozers on the payroll.