Commentary, NC Budget and Tax Center

New report: GOP proposal to slash and ultimately end state franchise tax is a mistake

A new report from the N.C. Budget and Tax Center offers a dim assessment of a recent proposal from North Carolina Senate Republicans to enact yet another cuts to state business taxes.

The latest proposal would reduce the franchise tax – a tax that companies pay on their net worth each year.

Bill sponsors have stated that their intent is to pursue complete elimination of the franchise tax in future years – a move that would result in a loss of more than $670 million per year that’s use to fund public services and structures like schools, transportation and protecting the environment.

This is from the report:

The franchise tax plays a vital role as an alternative minimum corporate tax that funds important priorities across the state. If a corporation manages to zero-out its corporate income tax liability because of tax breaks and loopholes (like single sales factor apportionment, a wide array of tax credits or the absence of mandatory combined reporting), the franchise tax ensures that corporation will pay a modest amount of tax to the state to support the state services and infrastructure from which they benefit – like the skilled workforce produced by state K-12 and higher education programs and the roads that enable corporations to get their products to customers. And the amount of franchise tax liability is modest, according to the latest data for tax year 2016, averaging just $628 annually for S corporations and $8,400 for C corporations.

Rather than reduce or eliminate the franchise tax, it is time that North Carolina policymakers develop a comprehensive plan for how businesses will contribute to their communities through taxes. This plan must recognize that the reduction in the corporate income tax rate has significantly reduced revenue and shifted the tax load onto individual taxpayers.

Let’s hope the proposal doesn’t get very far. As the report points out, cutting North Carolina business taxes further won’t make the state’s tax structure more “competitive.” The corporate income tax rate has already been slashed from 6.9 percent to 2.5 percent in recent years, and, at last count in 2017, North Carolina was already tied with Indiana for having the second-lowest business tax levels of any state. What’s more, as the graph above shows, it’s big businesses that pay an overwhelming share of the tax.

The bottom line: North Carolina already faces a host of unmet needs in our classrooms and our communities. Slashing already rock bottom business taxes is not the answer. Click here to read the BTC report.

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