What the Tax Foundation Rankings Don’t Say About Business Taxes in North Carolina
Once again, North Carolina ranks near the bottom (44th) of the Tax Foundation’s annual rankings of its State Business Tax Climate Index (SBTCI).
The appropriate response of North Carolina policymakers and residents to the state’s poor ranking should be: “Who cares?”
First, measuring poorly on the Tax Foundation’s business tax climate index does not mean that North Carolina’s businesses are paying a lot in state and local taxes. In fact, businesses in North Carolina are, on the whole, paying significantly less in state and local taxes as a share of the state’s economy than in almost any other state:
Second, the Tax Foundation’s SBTCI is simply an arbitrary formula based on a mishmash of 118 tax policies the Tax Foundation doesn’t like, regardless of whether those policies are considered sound tax policy.
For instance, the Tax Foundation admits that the a “dominant factor vaulting many” states to the top of their ranking system is the absence of a major tax (such as an individual income tax or a corporate income tax). Yet the National Conference of State Legislatures lists among its core revenue principles that “a high-quality revenue system relies on a balanced variety of revenue sources.”
Furthermore, the Tax Foundation expresses strong disdain for business tax credits, regardless of whether such credits are viewed by citizens and businesses as being a good investment or not. Yet an economic development expert cited frequently throughout the Tax Foundation’s report, Timothy Bartik, argues that well-targeted economic development incentives offer much more bang-for-the-buck for promoting economic development versus across-the-board business tax cuts.
In fact, contrary to the stated position of the Tax Foundation in favor of lower taxes, Bartik writes that, “for a permanent across-the-board reduction in state business tax rates, I calculate that benefits for state residents in higher earnings per capita are much less than costs.”
As we have argued frequently, North Carolina’s tax system no longer meets the needs of the people of the state and is long overdue for comprehensive reform. In looking for a set of principles to guide revenue modernization, however, state policymakers should look to what will work for North Carolinians, not for the people of the Tax Foundation’s favored states, Wyoming and South Dakota.