- Cooper is likely to call for an increase of NC’s corporate tax
- Corporate taxes, however, harm workers though job loss and declining wages
- State legislators should work toward eliminating the state corporate income tax to create jobs, grow wages and reduce cronyism
The Civitas Institute is educating North Carolinians about the benefits our state would enjoy by eliminating the state corporate income tax. Among the benefits of doing so are: reducing corporate welfare and cronyism, increasing job growth, creating the fifth best business climate in the nation, and increasing worker pay.
An academic study released earlier this year that highlights these benefits in greater detail can be found here.
Indeed, there’s little reason to keep the job-killing tax that produces but a tiny fraction of state revenue while imposing significant compliance costs on businesses.
Opposition to this idea will no doubt be strong and vocal, and likely spearheaded by Gov. Roy Cooper. In fact, in his budget proposal last year, Cooper included a provision to stop the scheduled corporate tax rate drop from 3 percent to 2.5 percent. This measure would have taxed job-creating businesses by more than $200 million in 2019, according to the proposal’s estimate.
An October 2018 study released by the National Bureau of Economic Research, however, provides more fuel for opposing corporate tax increases. In a comprehensive study of state corporate income taxes, the study’s authors found that “increases in corporate tax rates lead to significant reductions in employment and wage income.”
Specifically, the authors calculated that a 1 percentage point corporate tax increase leads to employment falling by 0.2 percent, and total wage income falling by about 0.3 percent. The findings led the study’s authors to conclude that corporate tax rate increases are “uniformly harmful.”
In short, increasing the state corporate income tax would cost jobs and reduce worker pay.
Interestingly, the study found that corporate tax rate cuts have statistically insignificant positive impacts during healthy economic times, but “appear to be effectual in boosting economic activity if implemented during recessions.”
That last part is especially notable given that many economists place a high probability on a national recession in the near future. Reducing the state corporate tax to zero would be a useful tool in limiting a recession’s negative economic impact in our state.
The NBER study’s finding that corporate income tax hikes have a negative impact on employment and worker pay is consistent with previous research showing that the majority of the tax’s burden falls on employees.
This shouldn’t be surprising.
The corporate tax is a cost imposed on businesses. Companies can respond to this cost in one of two ways: pass along the cost to customers with higher prices or reduce expenses. Because a price increase would hurt sales of the company’s product, the most prominent response to the corporate tax is cutting costs – and the largest expense for most businesses is payroll.
The key to understanding the true impact of a tax is to not just look at who is legally required to pay the tax, but to also understand how those paying the tax will change their behavior ― and who is affected by that response. The corporation may be writing the tax check to the state, but its workers are the ones who truly pay the price.
Corporations are easy to scapegoat, and easy to target for big-spending politicians thirsting for more tax dollars. But they likely employ the majority of working North Carolinians. According to U.S. Census Bureau data,[i] two-thirds of our state’s employed work for an establishment with 100 or more workers. That may be an imperfect proxy, but a strong indicator of the significant share of workers employed by corporations.
That means that increasing corporate taxes risks harming the majority of North Carolina workers.
Taxing corporations isn’t some costless way to collect tax revenue from rich CEO’s or wealthy out of state shareholders, it hurts working class people.
Moreover, the corporate tax only generates about 3 percent of state tax revenue, and has been found to be the most volatile source of tax revenue and one that imposes unnecessary compliance costs on businesses.
But the corporate tax is about more than money. The corporate tax encourages a culture of corruption and cronyism whereby businesses lobby for targeted subsidies and credits to offset the cost of the corporate tax. Reducing the corporate tax to zero would significantly reduce the need for cronyism, while creating a far more level playing field for all businesses.
Instead of seeking to raise the corporate tax like Cooper is likely to do, North Carolina legislators should be moving to eliminate it.
[i] Number of Firms, Number of Establishments, Employment, and Annual Payroll by Enterprise Employment Size for the United States and States, Totals: 2015. U.S. Census Bureau, Statistics of U.S. Businesses. Available online at: https://www.census.gov/data/tables/2015/econ/susb/2015-susb-annual.html