NC Budget and Tax Center

North Carolina can afford smaller class sizes, but not with corporate tax cuts

The next wave of disruptions to children’s educational success will not be another recession — it is the result of the decision by policymakers to put tax cuts ahead of that goal.

Policymakers should not get credit for acknowledging that smaller class sizes are important to children getting to third-grade reading proficiency and succeeding in school until they put the resources behind it.

Instead, state leaders passed another round of personal and corporate income tax cuts in the final budget this summer that will reduce state revenues by $900 million when in effect for a full fiscal year.  The reduction of the corporate income tax rate from 3 percent to 2.5 percent alone will account for roughly $100 million in revenue that could otherwise have been a down-payment on their pledge to reduce class sizes.

Funding the class-size reductions mandated by the same General Assembly would require at least $300 million.

Here’s why stopping the 2019 corporate income tax rate cuts is an important first step for policymakers to take immediately to prove their commitment to children’s educational success.

First and foremost, companies—even multi-state corporations—benefit from an educated workforce, and our state’s economy (and the median worker) benefits when our communities are able to deliver a top-notch education to every child.  Corporations can and should contribute to the human capital that allows them to increase productivity, innovate and, yes, earn record profits for their shareholders.

Second, the corporate income tax rate is not a determinant of whether a company will create jobs or locate in a certain place.  Instead, many other factors related to public investments such as education levels of workforce, research and development, proximity to innovative companies and transportation infrastructure rank far higher in decision calculations.

Moreover, the corporate income tax is paid by few relatively large corporations that are profitable.  Corporate profits are at a record high and have not translated into higher wages for workers or led to accelerated job growth.  Most research finds that more profits for corporations lead to higher payments to shareholders—many of whom are not based here in North Carolina—and not to job creation or wage growth.

Finally, corporations in North Carolina have already reaped significant tax cuts since 2013 and our employment levels still remain below pre-Recession levels.  The corporate income tax rate has been reduced from 6.9 percent since 2013 to the current level of 3 percent. A profitable corporation pays roughly 2.5 percentage points less on their profits than individual taxpayers do on their income. (The personal income tax rate was 5.499 percent.)

To add insult to injury, profitable corporations have also just received a federal tax cut that will provide even greater boosts to their balance sheet and shareholders.

North Carolina could afford to invest in every child’s educational success and the proven tools that make that possible, such as smaller class sizes.  But we can only do so if our leaders would stop prioritizing corporate interests and their shareholders above the well-being and educational success of our children.

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