by Dr. Roy Cordato
Senior Economist, Emeritas
NC has gone from 12 to 11 in The Tax Foundation’s Business Tax Climate Index. Here’s two bits of commentary from the Executive Summary. The rankings for all states are also included in the summary.
After the most dramatic improvement in the Index’s history in 2015—from 41st to 12th in one year—North Carolina has continued to improve its tax structure, and now imposes the lowest-rate corporate income tax in the country at 3 percent, down from 4 percent the previous year. This rate cut improves the state from 4th to 3rd on the corporate income tax component, the best ranking for any state that imposes a corporate tax. (Six states forgo corporate income taxes, but four of them impose economically distortive gross receipts taxes in their stead.) An individual income tax reduction, from 5.75 to 5.499 percent, improved the state’s individual income tax component rank from 15th to 13th. At 11th overall, North Carolina trails only Utah and Indiana among states which do not forgo any of the major tax types.
Building on prior years’ tax reform efforts, including rate reductions implemented this year, the North Carolina legislature adopted further reductions to both individual and corporate income tax rates, to take effect next year. The corporate income tax rate is scheduled to be reduced to 2.5 percent, while the state’s single-rate individual income tax rate will be set at 5.25 percent. These pending changes will be reflected in the next edition of the Index.
In the top 10 next year? A reduction in capital gains taxes and instituting expensing for capital investment would likely ensure it. Maybe the most important change that NC could make is to stop subjecting business to business purchases to the sales tax. As the Tax Foundation notes:
States that create the most tax pyramiding and economic distortion, and therefore score the worst, are states that levy a sales tax that generally allows no exclusions for business inputs. Hawaii, New Mexico, South Dakota, and Washington are examples of states that tax many business inputs. The ideal base for sales taxation is all goods and services at the point of sale to the end-user.
North Carolina also needs to be added to that list.