RALEIGH — North Carolina earns the dubious distinction this week of joining the Tax Foundation’s list of the top 10 states with the worst business tax climates. The John Locke Foundation’s top budget expert places much of the blame on recent sales-tax increases.
Voters in 11 counties will decide Nov. 2 whether to raise sales-tax rates even higher.
The Tar Heel State’s business tax climate now ranks No. 41 in the country, according to a Tax Foundation report unveiled Tuesday. That ranking for the 2010-11 budget year marks a two-spot drop for North Carolina, which ranked No. 39 in 2009-10.
“North Carolina has been saddled with one of the nation’s worst business tax climates for years,” said Joseph Coletti, JLF Director of Health and Fiscal Policy Studies. “Now our state joins the ‘elite’ company of places such as New York and California — the top-ten worst performers in the Tax Foundation ranking.”
The Tax Foundation attributed much of North Carolina’s most recent decline to increased sales taxes, Coletti said. “If you look at individual tax categories, North Carolina ranks No. 25 on corporate income taxes, No. 33 on property taxes, and No. 36 on individual income taxes,” he said. “We rank No. 44 on sales taxes. That’s where we’re taking the biggest hit.”
The General Assembly adopted a “temporary” sales-tax increase in 2009 to cope with its latest budget woes. That increase is scheduled to disappear July 1, 2011. Meanwhile, state lawmakers have given counties across North Carolina permission since 2007 to seek 0.25-cent local sales-tax hikes. Voters in 17 counties have approved those sales-tax hikes, including seven counties this year alone.
“Local sales-tax increases further weaken the state’s economic environment and discourage business growth,” Coletti said. “Despite this negative impact, voters in 11 counties are deciding next week whether to dig the economy’s hole even deeper with additional sales-tax increases. Those voters have a chance to halt the decline in the state’s business-tax climate.”
In addition to the increased sales-tax burden, the Tax Foundation takes special note of North Carolina’s high-profile efforts to give away tax breaks and cash grants to favored companies.
“State lawmakers are always mindful of their states’ business tax climates, but they are often tempted to lure business with lucrative tax incentives and subsidies instead of broad-based tax reform,” according to the report. “This can be a dangerous proposition, as a case [with] Dell Computers and North Carolina illustrates.”
“North Carolina agreed to $240 million worth of incentives to lure Dell to North Carolina,” the report continues. “Many of the incentives came in [the] form of tax credits from the state and local governments. Unfortunately, Dell announced in 2009 that it would be closing the plant after only four years of operations.”
Observers should not be surprised that the Tax Foundation ranking paints a different picture than other recent rankings of North Carolina’s business climate, Coletti said. “This Tax Foundation report focuses solely on business taxes,” he said. “While that’s an incredibly important piece of the puzzle for business owners and entrepreneurs deciding where to do business, it isn’t the only piece.”
Other rankings often focus on factors other than taxes, Coletti said. “Forbes recently ranked North Carolina’s business climate as one of the nation’s best, but that study emphasized factors that override the state’s uncompetitive business tax climate,” he said. “For example, North Carolina has had relatively low energy costs. It’s status as a right-to-work state has meant that labor costs also have been relatively low.”
Recent government policies are chipping away at those advantages, but they still influence national surveys, Coletti said. “Those advantages have helped mask North Carolina’s poor business tax climate, but it’s not clear how much longer this state can hang its hat on lower energy and labor costs, and even government integrity.”
The Tax Foundation’s numbers should send a clear message to state lawmakers, Coletti said. “The next legislature will need to reduce government spending and balance the budget without extending the temporary $1 billion state sales tax,” he said. “This is a step toward a fertile business environment where entrepreneurs can start businesses, local businesses can grow, and we don’t need to bribe companies to locate in North Carolina.”