State lawmakers have introduced House Bill 117 (HB 117) that pushes for more tax cuts that benefit corporations, even as the state faces an ongoing revenue shortfall resulting from the tax plan passed in 2013.
State lawmakers would like to change an arcane tax provision that determines the amount of state income taxes paid by corporations. The state’s current tax system uses a formula that considers a corporation’s property, payroll, and sales in North Carolina. However, the tax change – referred to as single sales factor (SSF) apportionment formula – would only consider the sales component for certain corporations.
Proponents of this tax change claim that it will boost capital investment in the state and create more jobs. However, as BTC has highlighted before, this claim is not supported by real-world evidence. What will happen, however, is a further reduction in revenue available for public investments and services that businesses depend and rely on.
Here’s a quick recap on why North Carolina should not shift to a SSF apportionment formula:
- SSF is not an effective economic development tool and is unlikely to spur economic growth and job creation, a common claim by proponents. Of the eight states that had a SSF formula in effect from 2003 to 2012, six were below the average of all states in retaining manufacturing jobs.
- SSF will not benefit North Carolina businesses with little or no out-of-state sales, putting them at a competitive disadvantage. SSF disregards a corporation’s in-state property holdings and payroll size in determining taxes, and therefore disproportionately favors corporations with a high quantity of out-of-state sales. This means that smaller North Carolina firms are less likely to benefit from this tax change while their significantly larger, multistate competitors will.
- If some corporations pay less, other North Carolinians will end up paying more. State lawmakers are required to produce a balanced budget, which means that a reduction in revenue as a result of shifting to a SSF will have to be made up with either a tax increase on other businesses or individuals or with a cut to state services – or some combination of both.
- SSF will further reduce revenue for public investments that promote economic growth. Reduced revenue from this tax change would deepen the state’s precarious fiscal picture, which entails a projected revenue shortfall of $271 million for the current fiscal year.
Instead of providing more tax cuts to profitable corporations, a better approach is to close existing tax loopholes that give preferential treatment to certain businesses at the expense of others. Instead of asking low- and middle-income taxpayers to shoulder more of the responsibility for funding public investments and services that we all enjoy and rely on, state lawmakers should ensure that profitable corporations pay their fair share. This approach would support a vision of a fairer tax system that works for all and would make the Tar Heel state more business-friendly by creating a more level playing field for all businesses.