Yesterday’s Joint Meeting of the Senate and House Finance Committees focused on North Carolina’s taxation of businesses. The group’s intent is to examine North Carolina’s tax structure and recommend reform ideas. Previous meetings focused on the state’s sales tax and income tax.
The meeting featured an overview of the state’s corporate and franchise taxes, along with an examination of North Carolina’s extensive list of targeted tax breaks.
One item of note, however, was in the opening remarks committee co-chairs Daniel Clodfelter (D-Mecklenburg) and Paul Luebke (D-Durham) touted the annual Council on State Taxation (COST) study on state business tax burden. The study ranked North Carolina as tied for the lowest business taxes paid as a share of the state’s economy.
But attendees of the committee meeting should take note: pay no attention to the study, it’s not an accurate portrayal of North Carolina’s business climate.
I wrote last year about the study when legislators were similarly propping up its results as some proof about North Carolina being a “low-tax” state on businesses.
- The COST study omits the retail sales tax in their calculations. North Carolina’s retail tax rate is higher than 31 states. How can a report that contains such a glaring omission be trusted?
- A study that claims Florida, Wyoming and Texas tax their businesses more heavily than Connecticut, California or Massachusetts should arouse a healthy dose of skepticism.
- The COST study is merely a snapshot of taxes paid in a given year, it does not capture the entrepreneurial activity not created due to North Carolina’s high marginal tax rates:
- The Ewing Marion Kauffman Foundation, a Kansas City based private foundation focusing on entrepreneurship, places North Carolina 36th in the “entrepreneurial activity” category of their 2007 State New Economy Index
- Overall job growth from 2001 to 2008 in North Carolina was second lowest among Southeastern states. The growth rate of 9.2 percent trailed well behind Florida (14.8 percent), Georgia (12.8 percent), neighboring South Carolina (10.6 percent) and the Southeast regional average (11.8 percent)
- North Carolina’s small business employment growth from 1999-2004 was only 9 percent – compared to 18 percent in Florida, 16 percent for Georgia and 13 percent for the Southeast region.
If North Carolina’s business climate is so outstanding, why is it not leading the Southeast, or among the national leaders, in growth? Moreover, why does the state feel the need to offer so many corporate incentives for businesses to locate – or simply stay – in the state?
Moreover, even COST senior policy director Joe Crosby admitted to Greensboro blogger Ed Cone that the study is not an accurate gauge of a state’s business climate: (HT: Joe Coletti)
The purpose of this study, though, isn’t to say that one state’s taxes on business are “low” or “high” but rather simply identify the existing burden as measured by legal incidence (as opposed to economic incidence—from an economic perspective, all business taxes are ultimately paid by real people). The study can’t answer the question as to whether a state’s business tax structure is “competitive”, though.
Also of note, Sen. Clodfelter’s comments yesterday seem to represent a change of heart regarding North Carolina’s business taxes. In a November 2009 Senate Finance Committee meeting, Clodfelter declared, “the existing tax system in North Carolina undercuts our competitive position and acts as a deterrent to new business investment and especially to the creation of new jobs.” But now he wants to brag on a misleading “study” to his committee colleagues that claims to show North Carolina has the nation’s lowest level of state business taxation?
Mr. Balfour correctly notes that the COST/E&Y study is not intended to argue that one state has a more competitive business or tax climate than another; competitiveness is a more complicated discussion that requires one answer the question “more competitive for whom?” The study simply estimates the magnitude of state and local taxes imposed on business (legal incidence). It does not attempt to estimate who bears the ultimate burden of these taxes (economic incidence). The answer to that question is clearly “real people”, but the study doesn’t delve into the question of which people. Finally, Mr. Balfour’s assertion that the study does not include data for the retail sales tax is incorrect. In fact, the study uses a sophisticated model to determine what portion of the retail sales tax falls on households and what portion falls on businesses (business inputs). Nationwide, the retail sales tax is the second-largest state and local business tax.