Tax cuts for profitable corporations will flow to shareholders, out of state

The tax plan signed by Gov. McCrory includes huge tax cuts for profitable corporations that are unlikely to boost economic growth in the state and will reduce revenue for investment in our public schools, healthcare services for the elderly, and other important public investments.

By 2015, the corporate income tax rate is cut to 5 percent from the current rate of 6.9 percent and will reduce annual tax revenue by around $217.9 million in fiscal year 2014-2015. The corporate income tax rate is cut even further in future years if revenue meets a certain target – which is actually below existing revenue projections – and would reduce annual revenue by more than $423 million. These benefits will flow to less than 10 percent of North Carolina businesses.

Corporate profits have reached historic levels in the wake of the Great Recession, even as the overall economy continues to experience a fragile recovery. Proponents of corporate tax cuts contend that requiring profitable corporations to pay their fair share of taxes would hurt the economy because these taxes are borne by workers (through lower wages) or consumers (through higher prices). Tax experts, including the Congressional Budget Office, however, have concluded that the owners of stock and other capital ultimately pay most corporate taxes. Furthermore, as much as 90 percent of the corporate income tax cut will flow to out-of-state residents, not North Carolinians.

Also, around two-thirds of the profits that corporations pay out as stock dividends are found to go to tax-exempt entities such as retirement plans and university endowments, with high-income individuals receiving the lion’s share of the remaining one-third of the dividends. Thus, if the corporate income tax was eliminated (as some state lawmakers have advocated) and the personal income tax was the only tax applied to corporate profits, then two-thirds of those profits would never be taxed. This would further worsen the state’s upside-down tax system and mean that businesses would not contribute to the schools, courts, and physical infrastructure that support their success.

Winners and losers are indeed created under the tax plan, as we have found in our analysis of the tax plan. Profitable corporations are obvious winners at the expense of small, start-up businesses and individual taxpayers. The evidence is clear that this is a losing strategy for job creation in our state.

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