Corporate Tax Cut Not an Effective Solution for North Carolina's Economic Woes
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May 28, 2004

NCCC asks why Governor Easley and some state legislators want to cut business taxes when revenues are critically needed for governmental programs such as consumer protection.

The governor has recently given support to reduce the state corporate income tax rate on corporate profits. Some state lawmakers have proposed to reduce the rate from 6.9 percent to 6 percent or lower as a means of stimulating job growth in North Carolina. Nevertheless, a report by the North Carolina Budget and Tax Center (BTC) argues against this decrease in the corporate tax rate.

North Carolina's current rate is the second highest in the southeast, but it ranks 29th in the nation. Furthermore, the state's corporate income tax rate is but one of many measures of the overall business tax burden in North Carolina. Two recent studies show the state's overall business tax burden is relatively low. The BTC report agrees that decreasing the tax rate looks like an appealing option given the "jobless" nature of the current economic recovery. However, it is quite likely that a rate decrease would do very little to stimulate new business investment in North Carolina.

Data from the IRS shows that state and local taxes (plus federal income taxes) paid by corporations account for only about 2 percent of business operating expenses. Therefore, the differences between states would have to vary considerably in order to significantly affect the business decisions of corporations. Lowering the rate is unlikely to stimulate economic growth and to create jobs as the architects of this plan envision.

The likely outcome of decreasing the tax rate is that the tax burden would shift to lower-income taxpayers while doing nothing for new business investment in North Carolina. A better solution is to plug loopholes, end wasteful incentives, target economic development strategies to the areas that need it most, and ensure that businesses are contributing their fair share. These strategies will go a long way towards making the current corporate income tax fairer to all businesses and would not require painful spending cuts or offsetting tax increases on working families.