High corporate and income taxes have caused North Carolina’s economic growth to fall behind the national average, as well as other Southeast states.
North Carolina needs to pursue economic policies aimed at keeping the state’s economy competitive, not only with neighboring states, but with the nation as a whole. A more competitive tax code will attract new businesses and provide incentives for entrepreneurs. New jobs and higher wages will create more opportunities and choices for North Carolina’s hardworking families. The result will be more prosperity for current workers, as well as a brighter future for the next generation.
A COMPETITIVE Tax Code for Businesses
– Lower the tax rate on all businesses to 5 percent. North Carolina’s current corporate tax rate of 6.9 percent is highest in the Southeast and higher than 21 other states. To become at least regionally competitive, North Carolina should seek to match South Carolina’s rate of 5 percent – currently the lowest in the Southeast. Moreover, all businesses should be taxed equally. The overwhelming majority of businesses in North Carolina (roughly 90 percent) file under the personal income tax rate – which has a highest marginal bracket of 7.75 percent – instead of the flat corporate tax rate of 6.9 percent. This problem can be resolved by creating a special personal income tax rate – equal to the new corporate rate of 5 percent – that would apply to businesses filing personal income tax forms. In response to the needs of business owners, South Carolina enacted such a law (HB 3007) in 2005.
– Exempt business inputs from taxation. North Carolina already exempts business inputs for several favored industries. For example, the state offers a 100 percent sales tax exemption on agricultural supplies. Likewise, manufacturing machinery and other inputs purchased by manufacturers is taxed at only 1 percent. By contrast, most other businesses are forced to pay the standard sales tax rate of 6.75 percent on the purchase of inputs. Cutting this rate to 1 percent for all businesses (while maintaining the exemption for agricultural supplies) would stimulate economic growth and create jobs.
– Modernize the tax code by eliminating or reducing corporate tax breaks. North Carolina offers dozens of preferential tax credits, deductions and exemptions to select industries and specific activities. Many of these credits – such as the roughly $10 million annual credit for Google – benefit only a narrow scope of favored corporations. Eliminating or reducing these special-interest tax breaks would free up funds that could be used instead to lower the tax rate for all businesses.
– Create uniform criteria for corporate incentives. Even as the state moves forward with phasing-out unfair incentives and tax breaks, North Carolina should make the current incentive process more transparent. This can be accomplished by:
• Creating more objective criteria to guide the economic development grant process – for example, by basing such grants on a “per job created” rate (as it relates to local average wages) applied evenly across the state;
• Returning to the original goal of using incentives to generate investment in economically distressed Tier 3 counties; and
• Limiting incentives to companies that actually create new jobs – as opposed to merely rehiring laid-off workers.
Estimated revenue impact: The corporate income tax generates approximately $1.2 billion per year (FY2005-06). Cutting the tax will likely stimulate growth, partially mitigating any loss in revenue. Alternatively, if the tax on corporations had been 5 percent, revenues would have proportionately decreased (assuming a static economy) by $330 million. Curbing tax incentives and corporate handouts would offset some of this revenue loss, as would many of the reforms discussed below.
NORTH CAROLINA’S ECONOMY GROWING,
Real personal income growth in North Carolina from 2000-2006 was a steady 7.3 percent. This rate, however, was far below that of Florida (15.1 percent), Virginia (13.2 percent) and Tennessee (10.5 percent). North Carolina also lagged behind the national growth rate of 9.3 percent. As a result, North Carolinians have fallen further behind the national average income rate. In 2000, North Carolina’s per capita income was 98.1 percent of the national average; by 2006 it had fallen to 96.3 percent.
Higher Unemployment Rate
North Carolina’s unemployment rate exceeded the national average only once in the 25 years prior to Governor Easley’s election in 2000. Since then, our unemployment rate has outpaced the national average 7 years in a row.
Personal Income Growth Among Lowest in Nation
For the past 10 years, North Carolinians have seen their income grow more slowly than the average American. By contrast, during most of the post-WWII period, income growth in North Carolina outpaced the national average. In 2006, the growth rate of personal income in North Carolina was only 3.8 percent – tied for the third-lowest growth rate in the nation.
Tax RELIEF for Working Families
– Lower those taxes that hit the working poor the hardest.
1. Cut the gas tax. Capping the tax at 30.15 cents per gallon until June 30, 2009, was a step in the right direction. But even at this rate (reached as of January 1, 2008), the tax is still the 15th highest in the nation and the second highest in the Southeast behind only Florida (which does not have an income tax). North Carolina should reduce the tax to 25 cents per gallon, much closer to the national average (roughly 23 cents) and closer to other southeastern states such as South Carolina (16.8 cents), Virginia (19.2 cents), and Georgia (21.4) cents.
Estimated revenue impact for FY2007-08: $305 million
2. Repeal the remaining “temporary” sales tax. The current average statewide rate (combining state and local rates) of 6.75 percent is higher than 31 states – and significantly higher than neighboring Virginia (5 percent). Keeping the remaining portion of the “temporary” sales tax rate will drain an estimated $258 million from the economy in FY2007-08 alone – money that could be left in the hands of consumers and entrepreneurs to create jobs.
Estimated revenue impact for FY2007-08: $258 million
Lower the top marginal personal income rate to 7 percent. Lowering income tax rates will free up money for investment in North Carolina’s economy, creating more job opportunities. North Carolina has the highest top marginal income tax rate in the Southeast and the 10th highest in the nation (with a top rate of 7.75 percent as of January 1, 2008). The lower rate can be phased-in via 0.25 percentage point reductions over three years. Currently, 15 states either levy no tax on personal income or have one rate for all income levels. Taxpayers who want to contribute more can be given the option to pay at the higher rate.
Estimated revenue impact for FY2007-08: Unavailable; revenue impact would be partially offset by dynamic economic growth.
Tax RELIEF for the Elderly and Retirees
As the baby boomers age, seniors and retirees will become an increasingly important demographic in North Carolina. In order to prepare for this “gray revolution,” the state needs to do more to make North Carolina affordable for its retirees and seniors living on a fixed income.
– Increase the deduction for private pension income. North Carolina’s deduction is only $2,000 – by far the lowest in the Southeast. Tennessee and Florida do not tax private pension income at all. Virginia, South Carolina and Georgia all provide deductions for private pensions ranging from $12,000 (Virginia) to $25,000 (Georgia).
Estimated revenue impact for FY2007-08: Unavailable
– Repeal the state “death tax.” North Carolina is one of only 17 states that have “decoupled” from the federal estate tax, meaning that the other 33 states will see their estate tax repealed in 2010, along with the federal estate tax. Not only is it inherently unfair to levy a “death tax,” repealing this tax will keep more money in the hands of small business owners and others.
Estimated revenue impact for FY2007-08: $171.8 million
– Repeal the gift tax. North Carolina is one of only four states that levy a gift tax. The state imposes a tax – paid by the donor – on gifts valued at more than $12,000. This state tax is levied in addition to the federal gift tax.
Estimated revenue impact for FY2007-08: $16.7 million
Economic Growth is the Best Remedy for Poverty
A January 2007 study published by the Texas Public Policy Foundation compared state government policies and poverty rates in the 1990s. According to the study, “Private sector job growth is the most effective anti-poverty program.” In turn, the best driver of private sector job growth is lower taxes and less spending by state governments. The study, which included a comparison of poverty reduction in the 50 states during the 1990s, found that:
Higher taxes lead to higher poverty rates
More government spending made poverty rates worse
As the study concluded, “High taxes and the policies that come with them inflict more harm than the resulting spending does good for the poor.”