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Large multi-state corporations take advantage of the fact that North Carolina’s corporate tax rules allow affiliated companies to file separate tax returns as if they are unrelated. The Secretary of the Department of Revenue has the power to force certain affiliated companies to file combined tax returns so that the department can more accurately assess the amount of profits earned in North Carolina by the related group of businesses. In FY 2009-10 the Secretary used this authority to evaluate the tax returns of several corporations and assessed back taxes and penalties that netted the state $272 million in additional tax revenues. Under current state law when a back tax liability is issued the state also assesses a 25% penalty to those tax returns, the proceeds from which are allotted to public schools in keeping with North Carolina’s constitutional requirements.

The Senate’s budget bill included a 6-line provision that would take away the Department of Revenue’s ability to the 25% penalty when it determines that a corporation and its affiliates used their separate filing status to avoid paying the appropriate share of taxes to the state. This 25% penalty gives an important added incentive for these corporations to pay up. In fact, without this additional penalty many of these companies would continue to dispute their tax bills, costing the state hundreds of millions of dollars. The court affirmed that this penalty is legal in its findings in the Walmart case when that company tried and failed to dispute its new, larger, and much more accurate tax bill.

Finally, the Senate’s budget, like the governor’s, included an additional $110 million in anticipated tax revenues in FY 2010-11 from these very efforts by the Department to more accurately assess the tax bills of these corporations. If the department is not allowed to add the 25% penalty to these assessments then much of the incentive for corporations to pay up now goes away, thus putting this extra $110 million in jeopardy.

Of course the simplest solution is to do what the majority of states who levy a corporate income tax have done and force related companies to file combined tax returns rather than simply allowing the Secretary of Revenue to select certain companies and force combinations for tax purposes. But in the absence of this solution the state should at least stick by the Department’s determinations as to which companies should be forced to file combined returns and therefore also may owe more taxes. If state leaders strip some of this authority away by removing the 25% penalty, at the very least they need to be honest and take the additional $110 million in tax revenues out of their budget because it simply won’t be there.

The Council on State Taxation and Ernst and Young accounting firm just released their annual analysis of state tax burdens on business. Ranking last, i.e. having the lowest taxes on business, is our own home state of North Carolina. That’s right. NC’s state and local taxes paid by businesses represent 3.5% of total Gross State Product which ties our state with Oregon for the lowest taxes on business. The analysis certainly isn’t perfect. A good argument can be made that it actually overstates the share of state and local taxes that are paid by businesses and that it understates the benefits to businesses of some types of government spending (educating current and future workers, administering the courts, etc.). Nonetheless, the report makes it pretty obvious that cutting business taxes in North Carolina is not the ticket to growing our state’s economy.

Today the conservative Tax Foundation released its annual Tax Freedom Day report declaring that April 9th will be the day that Americans will have “earned enough money to pay this year’s tax obligations at the federal, state and local levels.” The report has serious methodological flaws. Among other things, it misrepresents the typical person’s tax responsibility by lumping in taxes paid primarily by higher income taxpayers and businesses into its calculations of the “average tax burden.”

More worrisome than the methodological flaws, however, is the bizarre implication that somehow once our collective tax payments are remitted to government they then somehow simply evaporate. What actually happens on April 9th (if you buy the methodology that generates this date) is not merely that we are finished paying this year’s tax bills but rather that we are finished paying for the stuff we have decided to purchase collectively like Social Security, Medicare, roads, schools, disease research, health inspections, national defense, Pell Grants, etc. etc.

The report calculates that North Carolinians will actually reach tax freedom day slightly earlier, April 7th to be exact, than the rest of the nation, largely because our incomes are lower and therefore not subjected to the progressive federal income tax structure to the same degree as states with typically higher incomes. Just think, we as North Carolinians could be “free” so much earlier this year if our state leaders would: release a few prisoners early, shave a few weeks off of the public school year, close the doors to the community colleges and universities to some of the half-a-million unemployed workers who currently reside in our state, trim back on those “luxurious” health care benefits like dental care and eye screenings that we provide children in low-income families, scale back on the number of fire-fighters, EMS workers and police officers in our communities, crowd the courts a bit more, forego some road maintenance projects and postpone some environmental clean-up initiatives. Making choices like these would provide us all with more tax “freedom.” Doing so would also make this a pretty crappy place to live, put thousands of people out of work and sabotage our state’s future – a pretty high price to pay for more “tax freedom.”

A few months ago Karl Smith, an Assistant Professor of Public Economics and Government, at the UNC-CH School of Government launched a blog where he posts his thoughts and analysis about NC’s economy. Economic analysis is often complicated and impractical. Karl’s blog is not like that at all. He gives his take on controversial questions, like is the “Fair Tax” really fair, and he shares his assessment of the latest state-level economic indicators. I particularly enjoyed his latest post where he looks at the question “Is the Stimulus Big Enough?” First he gives all the facts and figures about how much the economy has really shrunk and then concludes the following:

So, with stimulus closing at best half of the output gap and the housing and financial markets still on the fritz, what can we expect. At this point I for see a long slow recovery.

Even though the recession is technically over, it won’t feel over until well into 2010 and we wont see unemployment back under 6% until at least 2015. That’s five more years of an economy that weaker than what we’ve grown accustom to.

Now there is some chance that monetary policy could change that. That the Federal Reserve could do some things to juice up growth. However, this is currently a major area of debate among economists and the Federal Reserve has not yet signaled that it is willing to do those things.

If you want an easy way to learn more about how the economy works and how public policy shapes it I recommend adding North Carolina Economics to your web browsing repertoire.

Yesterday in his comments at the Budget & Tax Center’s legislative briefing in Fayetteville, Senator Rand said that the he has been told by legislative fiscal staff that state tax revenues are behind projections by $90 million through the end of October. In the grand scheme of things that is not too much money. What is troubling about this is that the state’s revenue forecast assumes that the worst months would be at the beginning of the fiscal year and after that things would begin to head slowly upward. Moreover, the budget for fiscal year 2010-11 assumes that revenues will grow at a rate of 2.8%. If revenues continue to fall behind the forecast the Governor will be forced to take painful mid-year actions to address this year’s gap and the General Assembly will be forced to make another round of budget cuts sooner rather than later.

On a related note, the Center on Budget and Policy Priorities, just released a new report that looks at how states around the country are faring. It turns out they are not faring well at all and state budget gaps are a major drag on the fragile economic recovery. In addition to assessing the fiscal state of the states, CBPP’s report looks at why the federal government should consider another round of aid to state and local governments to mitigate the drag that state budget gaps are having on the economy and to prevent more harmful budget cuts.