At 2.5 percent, North Carolina has the lowest corporate tax rate of any state, among states that impose one. It not only produces a tiny fraction of state revenue but represents the most volatile source of tax revenue as well.
There are many compelling reasons to eliminate this small and unreliable source of state revenue, foremost among them are fairness, economic growth and the elimination of political corruption.
And the coronavirus economic shutdown recession actually strengthens the case.
Following are the top three reasons why North Carolina should eliminate its corporate income tax.
Fairness
Imagine being a competitor of one of the businesses receiving a state taxpayer handout. Your competitors are receiving millions in additional revenue not based on selling their product, but because of political privilege.
You are forced out of business, and people lose their jobs because you can’t compete against the cronies that get to add taxpayer handouts to their bottom line. How is that fair?
By eliminating the state corporate income tax, there would be little reason for the state to continue its patchwork of corporate giveaway programs like the Job Development Investment Grant (JDIG) and One North Carolina funds.
Funds like these unfairly reward those companies with the most effective lobbyists with political privileges, giving them a competitive edge in the marketplace. Without a corporate income tax, there would be no need for state lawmakers to try and lure companies with handouts to offset their tax burden.
Moreover, the state offers countless targeted tax breaks which means some businesses and industries are granted political advantages. No corporate tax means no need for targeted tax breaks. Every corporation’s tax rate would already be zero.
A far better and fair incentive program would be to replace our state’s current web of targeted crony handouts and politically motivated tax breaks with the elimination of the state’s corporate income tax. Doing so would create the same tax-free environment for all corporations, creating a far more fair economic climate.
Better for the economy
Research has shown that the state corporate income tax is the state tax most harmful to economic growth. Moreover, those most harmed by the corporate tax are workers, mostly in the form of lower employment and wages.
An October 2018 study released by the National Bureau of Economic Research 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, the state corporate income tax costs jobs and reduces 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 the recessionary period we are entering as a result of the coronavirus shutdown. Reducing the state corporate tax to zero would be a useful tool in limiting the recession’s negative economic impact in our state.
Furthermore, the state’s current system of targeted corporate handouts has been found to be highly ineffective.
Recent reporting by WRAL found that companies receiving such handouts between 2009 and 2016 have “so far reported hiring just over half the jobs announced” under the state’s two largest incentive programs: the Job Development Investment Grant and One North Carolina Fund.
A stunning one-third of the incentivized projects failed to create a single new job.
Additionally, a recent research paper co-authored by Columbia and Princeton University economists released earlier this month concluded that state and local government incentive packages fail to “increase broader economic growth at the state and local level.”
The paper further suggests that, in fact, “the welfare effects of these subsidies might be negative on average,” meaning they might do more economic harm than good.
A 2019 academic report co-authored by a High Point University economist and her economic consultant partner, and released by the Civitas Institute, found that eliminating North Carolina’s corporate income tax would create 43,000 more jobs over 10 years. Furthermore, the state could expect overall average salaries to increase by more than $1,500 during that time.
Corporate tax elimination would generate more jobs and bigger paycheck for North Carolina workers, even more so in response to the coming recession.
Reduce culture of corruption and pay-to-play politics
Not only does our current system of targeted handouts and tax carve-outs not live up to its promises, it also creates a political culture ripe for corruption. With more economic power concentrated in the hands of a few in Raleigh, there is far greater benefits for corporate lobbyists to gain in pay-to-play schemes.
When politicians signal their willingness to dole out millions of dollars to hand-picked businesses, there’s no shortage of businesses lining up with their hands out. Naturally, those companies offering something of value to the politicians – and not always legal gifts – will go to the head of the line.
Want to reduce government corruption? Start by replacing the current system of corporate welfare “economic incentive” programs with an across-the-board zero corporate tax. The fewer things that politicians control, the less we have to worry about who controls the politicians.
Conclusion
It’s time to make North Carolina’s economy fair and attractive to all job creators. It’s long past time to eliminate the culture of corruption in Raleigh that comes with cronyism. Repealing the corporate tax will also improve upon North Carolina’s recent economic surge and signal to job creators that the Tar Heel state is open for business.
The corporate tax only generates about 3 percent of total state tax revenue, and it is the most volatile form of revenue. Compensating for the lost revenue could easily be achieved through a combination of eliminating corporate welfare taxpayer handouts, increased revenue growth from other taxes due to increased economic growth and eliminating pork spending.
Corporate tax elimination would not only create a fair playing field but facilitate greater economic growth and reduce political corruption as well.
