November 24, 2015

RALEIGH — Recent historic tax reforms have helped North Carolina jump from No. 44 to No. 15 in the Tax Foundation’s annual ranking of state business climates. A new John Locke Foundation Spotlight report focuses on the reforms that attracted the Tax Foundation’s attention.

“North Carolina is on the right path to becoming a top-10 state thanks to the tax reform legislation approved in recent years,” said report author Sarah Curry, JLF Director of Fiscal Policy Studies. “The Tax Foundation estimates once all reforms are fully phased in, North Carolina’s overall ranking will be 13th best in the country. If we continue down the same path, hopefully North Carolina will be a top-10 state before too long.”

Officially known as the State Business Tax Climate Index, the Tax Foundation report assigns states an overall rank after comparing them in the areas of corporate income tax, individual income tax, sales tax, unemployment insurance tax, and property tax.

In moving up 29 spots on the Tax Foundation’s overall list, North Carolina saw improvement in three of the five tax categories. The state has jumped from No. 30 to No. 7 in the corporate income tax ranking and from No. 42 to No. 14 in individual income taxes. The state also moved up from No. 47 to No. 31 in the sales tax category.

At the same time, North Carolina dropped one spot in the unemployment insurance tax ranking, from No. 10 to No. 11. At the same time, the state’s property tax ranking dropped from No. 29 to No. 32.

“While North Carolina ranks high on the index, the state can do better and increase its ranking even further,” Curry said. Several states ranked near the top of the Tax Foundation’s overall list do without one or more of the major taxes compiled in the rankings.

“Wyoming, South Dakota, Nevada, and Texas have no corporate or individual income tax,” Curry said. “Alaska has no individual income or state-level sales tax. Florida has no individual income tax. Montana and New Hampshire have no sales tax. All eight of these states rank within the nation’s top 10.”

That doesn’t mean North Carolina must get rid of one of its taxes completely to reach the top 10, Curry said. “Two of the current top 10 — Indiana and Utah — levy all of the major tax types, but do so with low rates on broad bases.”

In addition to analyzing Tax Foundation numbers, Curry recounts North Carolina’s recent tax history and focuses on changes that have improved North Carolina’s tax code since 2013.

“In the area of individual income taxes, policymakers replaced graduated rates with one flat rate,” she said. “They have lowered the individual income tax rate over several years — most recently to 5.499 percent for 2017. They’ve broadened the tax base by closing or limiting many targeted income tax credits and deductions, expanded the child tax credit and standard deduction, and repealed the state estate tax, often referred to as the ‘death tax.'”

Business-related taxes also have seen significant changes over the past three years, Curry said. “Policymakers lowered the corporate income tax rate over three years, with a further reduction subject to a state revenue trigger,” she said. “They broadened the tax base by allowing many credits to expire and eliminated local business privilege taxes. They also phased in something known as ‘single sales factor apportionment.’ This determines the percentage of a multistate operation’s total profits that are taxable, based on the percentage of sales made in the state.”

Curry also highlights sales tax changes. “Lawmakers broadened the sales tax base modestly to include certain service contracts and repair or maintenance services associated with the purchase of tangible personal property,” she said. “They eliminated the state sales tax holidays and special tax rates for electricity, piped natural gas, amusements, and entertainment.”

The John Locke Foundation will continue to offer suggestions for lawmakers seeking ways to improve the state tax code, said Dr. Roy Cordato, JLF Vice President for Research and Resident Scholar.

“Recent recommendations to abolish the corporate income tax, reduce or repeal capital gains taxes, and replace depreciation with business expensing fit with the overall theme of improving North Carolina’s tax code,” Cordato said. “Reformers should continue to focus on reducing the tax system’s bias against productivity and job creation, reducing favoritism and special carve-outs, simplifying the tax code, and reducing the overall burden on taxpayers.”

Sarah Curry’s Spotlight report, “Tax Reform in North Carolina: John Locke Foundation principles move the state in the right direction,” is available at the JLF website. For more information, please contact Curry at (919) 828-3876 or [email protected]. To arrange an interview, contact Mitch Kokai at (919) 306-8736 or [email protected].