Tax reform

Tax reform is important for North Carolina's economic future. Reform proposals offered in the General Assembly, however, would put as much emphasis on raising taxes as on reforming them. That is the wrong approach.

Taxes should apply as broadly as possible with as low a rate as possible. Tax policy should be based on the principles of simplicity (making it easy to understand), neutrality (not penalizing some activities relative to others), and liberty (allowing people to keep as much of their money as possible). North Carolina's current tax code is not very good on any of these counts.

Key Points

Recommendations

  1. Remove targeted tax cuts and hikes. State policymakers should remove tax provisions from the state tax code that are inconsistent with principles of simplicity, neutrality, and equity. In every case, the goal should be to lower tax rates while offsetting at least some of the revenue loss by broadening the tax base to eliminate bias.
  2. Switch to a flat-rate consumed income tax. North Carolina should reform its income tax system to create a single-rate, easy-to-understand tax on consumed income that ends multiple layers of taxation on savings and investment. That reform would make corporate dividends entirely tax deductible or abolish corporate income taxes. It could also offer tax exclusions for household investment in education, health, and other private human-capital formation.
  3. Don't reform the tax code to raise revenue. Although they use the welcome phrase, "broaden the base and lower the rate," legislators seeking tax reform in North Carolina had an implicit third goal in mind — to increase revenue. Tax reform will not work unless it is revenue neutral or, even better, reduces revenue. That means spending reform must come first.
  4. Reduce or abolish the corporate income tax. Corporations do not pay taxes but merely channel taxes from their owners, customers, and workers into taxes. Research suggests 70 percent of the corporate tax burden is borne by labor. Reducing North Carolina's corporate income tax rate would improve the state's overall business climate.

Analyst: Joseph Coletti
Director of Health and Fiscal Policy Studies
919-828-3876 • jcoletti@johnlocke.org