NC Budget and Tax Center

NC Senate debates new corporate tax cuts; Data, graphs show why the approach isn’t working

With the Senate Finance Committee slated to approve another round of business tax cuts that will overwhelmingly benefit large, high net worth corporations, we’re sure to be treated to another round of economic myth-making. Proponents consistently promise cutting taxes will supercharge North Carolina’s economy but, years into the experiment, there’s still no evidence to support their bold predictions.

North Carolina’s economic track record over the last several years has been remarkably unremarkable, particularly when compared to our neighbors in the southeast. Job growth has roughly followed the national trend, and has actually been slower than some nearby state where taxes have remained steady over the last several years. Total non-farm employment in North Carolina has expanded by 10.9% since January of 2014 when the first round of tax cuts took effect, which falls shy of the 12.8% growth for Georgia, 12.6% expansion for South Carolina, and the regional average of 11.4% for the South Atlantic.

The story is even less encouraging when one looks beyond overall job growth and focuses on two industries that have been particularly vital to North Carolina’s economic prospects.

First, “professional and business services” has emerged as one of the most important sources of good-paying jobs, particularly in areas like the Research Triangle Park and Charlotte. While the sector has grown substantially in the last few years, North Carolina’s 14.7% growth since January 2014 has been well off the pace set by Georgia (17.4%) and South Carolina (18.0%).

Second, and even more distressingly for a state with a proud legacy of making things, manufacturing job growth in North Carolina since January 2014 has been roughly one half of what it has been in the two states to our immediate south. Given how reliant much of North Carolina is on manufacturing jobs, this lack of robust growth is particularly worrisome for many communities where few other industries offer comparable employment opportunities.

In spite of this evidence that tax cuts have failed to boost North Carolina’s economy, a virtually identical set of additional cuts was included in the House budget. It up to North Carolinians to demand less myth and more economic meat.

Dr. Patrick McHugh is a Senior Policy Analyst at the N.C. Budget & Tax Center.

NC Budget and Tax Center

Tax cuts have pitted capital needs against education, health, other vital services

North Carolina’s budgeting mechanism for servicing debt, paying to repair state property, and investing in new capital projects will change on July 1 with the implementation of the State Capital and Investment Fund (SCIF). Given that North Carolina has been underfunding repairs, renovations, and new capital projects for years, creating a pot of funds to address these needs that is separated from the rest of the General Fund does make a certain amount of sense.

The challenge, however, is that years of tax cuts have squeezed our ability to fund the needs of a growing state, so setting funds aside for capital projects at the outset of the budgeting process will create even fewer resources in other areas of the budget. The result is that our state is facing a growing gap between the revenue we need to keep up with providing basic services and with maintaining and building infrastructure to serve North Carolinians and the revenue that we collect.  This will only get worse in future years as the tax cuts continue to reduce revenue annually by at least $3.6 billion from what would have been collected under the tax code before the tax cuts began in 2013.

The SCIF creates a new dedicated pot of funds for these capital needs that is taken out of the General Fund before other appropriation decisions are made. The SCIF is funded statutorily with 4 percent of general fund revenues (projected to exceed $950 million for 2019-20 fiscal year), and 25 percent of the unreserved fund balance ($237.5 million in the upcoming fiscal year). Those funds will first be used to make $721 million in debt payments, with another $250 million devoted to repairing existing state facilities, and just north of $200 million for new capital projects.

Creating the SCIF has some merit as capital improvements and repairs are often the first things to get cut when budget writers don’t have enough revenue to go around, but a few bits of context are still important.

First, the scope of North Carolina’s capital needs far exceeds what the SCIF can meet in its current arrangement. North Carolina’s schools alone have over $8 billion in facility improvement needs, and that is only one area of capital needs that have been underfunded for years. Building and maintaining quality public facilities doesn’t come cheap, and the SCIF simply won’t generate enough funding to deliver what North Carolinians deserve.

Second, by setting aside debt and capital funds before the rest of the budgeting process takes place will make it even harder to meet all of the other needs of a growing state. While budget writers were in committee discussing the House’s proposal, thousands of educators were just outside demanding more funding for supplies, school nurses, teaching assistants, and a range of other vital educational needs that have gone wanting in recent years. And across areas of health, housing, and environment, documented needs for investments that would protect the public good have gone unfunded.

All of these challenges are rooted in years of decisions to give wealthy individuals and big corporations billions a year in tax cuts. Just this year alone, a scheduled reduction in the Corporate and Personal Income Tax rates drained another $900 million from the state’s coffers, funds that would have more than covered our existing debt payments without diverting support for everything else.

A final important note: At a time when revenue is already reduced, the move to solely propose funding capital projects through available revenue rather than looking to the potential for a state bond to take advantage of low interest rates is concerning.

As noted by some legislative leaders, this appears rooted more in fears of debt than in a practical consideration of what financing mechanisms would best allow the state to achieve its full set of priorities for our families and communities.

In the end, the SCIF is a cautionary tale. After years of lavishing tax cuts on the most prosperous North Carolinians, the legislature has backed itself into a corner where the only way to start addressing the need to repair existing facilities and build new ones is to take even more funding away from other services that are needed today.

NC Budget and Tax Center

Trump tax policy helped many of the biggest corporations completely avoid taxes in 2018

With last years’ tax returns now in, it is all the more evident how massive a gift the Trump Administration and Republicans in Congress gave corporate America in their 2017 package of tax cuts. Many of America’s wealthiest corporations received a huge windfall in 2018, even as most Americans face the prospect of declining public services and deepening public debt.

A recent report shows that 60 of the largest corporations managed to pay no corporate income taxes in 2018, and many of these companies actually received substantial tax rebates. A few notable examples of corporations who made off particularly well under the Trump tax cuts include:

  • Amazon: Had $11 billion in revenues from business in the United States and received $129 million in tax rebates.
  • Netflix: Paid no corporate taxes on over $850 million in U.S. income.
  • Chevron: Revenues from U.S. operations of approximately $4.5 billion and received $181 million in federal tax rebates.
  • Halliburton: Took in over $1 billion in U.S. revenues, and received a $19 million tax rebate

These companies managed to avoid taxation by exploiting a range of loopholes in the federal tax code that were either left untouched or actually expanded by the 2017 tax bill.

Capital-intensive companies like Chevron and Delta Airlines were able to slash their taxes using Accelerated Depreciation, a provision well known in corporate accounting circles but not widely understood beyond those circles, that allows companies to claim larger tax write-offs for the decreasing value of expensive equipment.

Amazon and Netflix were leaders in using stock option payments to their corporate executives to avoid millions in corporate taxes. Even though granting stock options does not directly hit companies’ revenues like salaries would, corporations can still claim the value of the options as an expense and thereby reduce their tax bill. Moreover, these options also allow wealthy executives to avoid paying the personal income tax rate on that income, instead paying the lower rate applied to capital gains.

A range of other companies were able to zero out their taxes in 2018 using tax credits for energy production, research and development, and other special treatment still littered throughout the federal tax code.

Instead of draining the swamp, the 2017 tax cuts only gave smart corporate attorneys more bog to explore. The result was predictable: Most working families and small businesses got peanuts (or saw their taxes go up) while many of the biggest corporations in the country avoided paying taxes altogether. Sooner or later we have get serious about getting large and profitable companies to pay their share, or we will all end up paying the bill for tax breaks that mostly benefit the most fortunate.

NC Budget and Tax Center

School construction debate part of a larger infrastructure crisis for NC

The current debate in Raleigh over how to address the billions of dollars in school construction needs is part of a much larger discussion about how to maintain and build the physical infrastructure that makes modern life possible. A new report documents how declining public investments have left America’s roads, bridges, water pipes, sewers, airports, railroads, and schools in bad shape.

See our recent report Make Space for Learning on how years of tax cuts and broken promises created the school facility crisis and for analysis of the competing plans currently in the legislature.

Even as the nation’s engineers sound the alarm, governments across the country are investing less in infrastructure as a share of the economy than at any point since the 1950s, and North Carolina is no exception. Our collective investment in shared infrastructure has fallen markedly, a major reason that our schools, roads, and other systems are in such dire need of an upgrade.

As is often the case during economic downturns, the NC General Assembly diverted funds from infrastructure to address the budget crisis created by the Great Recession, delaying repairs and putting off new projects. What came next, however, was less common. Instead of getting back to work when the economy improved, legislators passed several rounds of tax cuts and kept kicking the infrastructure can down the road.

The choice to pursue tax cuts that overwhelmingly benefit the wealthy is why we are behind on paying for infrastructure that benefits us all. It is why North Carolina passed the $2 billion Connect NC bond to pay for university, community college, and state park facilities in 2016, it is why the legislature authorized the $3 billion Build NC bond Act to update North Carolina’s roads last year, and it is why we are contemplating issuing bonds this year to pay for school, water, and sewer facilities. Tax cuts have costs, and those costs manifest over time in crumbling roads, failing bridges, and decaying classrooms.

Public investments can knit the country together, ensure that our drinking water is free from poison, that our children have inspiring places to learn, and create public spaces and parks that feed the soul. As we can see in the current school construction debate, when we turn away from building a better future, we all suffer.

NC Budget and Tax Center

Report: Corporations are stiffing North Carolina on $373 million in state taxes

We all know that rich shareholders and global corporations find ways to avoid paying their fair share in taxes, often through complex accounting schemes that boggle the mind. That’s why everyone should take heed of a new report showing that a few tweaks to North Carolina’s corporate tax code could stop global companies from dodging an estimated $373 million in state tax obligations.

It turns out that state leaders can ensure that companies pay the proper amount of taxes on income generated from business conducted in their jurisdictions, but existing tax codes at the state level often allow loopholes for smart corporate tax lawyers to exploit. Corporations often use accounting sleights of hand to move income around within the United States and to offshore tax havens, regardless of where the sales and production that created that income took place.

Adopting a policy generally known as “combined reporting” that bases a company’s income tax bill on how much of its activity takes place within a given state would prevent large companies from ducking an estimated $17 billion in state taxes that they are currently avoiding. Here in North Carolina, preventing companies from exploiting domestic tax havens (like Delaware) could bring in an additional $151 million in revenue, and stopping the practice of parking income outside of the United States could net another $222 million.

Global tax avoidance doesn’t just leave the rest of North Carolinians to pick up the tab, it undermines homegrown companies that don’t have a footprint outside of the state. When global corporations hide income in corporate tax havens, they often get a leg up on companies here in North Carolina that actually pay their state taxes in full, making it all the more difficult for smaller enterprises to contend with their global competitors.

Global corporations have already gotten enormous breaks on their federal and North Carolina taxes in recent years which only tilted the economic playing field further in favor of the very wealthy. It’s high time that we compel wealthy shareholders and profitable corporations to reinvest in the county that made them rich in the first place.

As legislators return to Raleigh with a long list of vital public needs to address, and not nearly enough state revenue to do the job, this report provides some invaluable guidance. Preventing large corporations from dodging taxes is a win for mom-and-pop businesses, for resident North Carolina taxpayers, and would make our tax system far more balanced than it currently is.