- Taxes currently appear to be at the forefront of North Carolina legislators’ minds
- North Carolina has made great strides in tax reform over the last dozen years
- Here are three more reforms legislators should consider to ensure North Carolina doesn’t fall behind other states
Differing viewpoints on how to handle scheduled future income tax rate reductions is reportedly the major sticking point keeping the North Carolina House and Senate from agreeing on a state budget — even now that we’re more than seven months into the fiscal year.
Senate leader Phil Berger just announced on Feb. 3 that the Senate will be joining the House in forming a committee dedicated to evaluating ways to reform local property taxes.
So it seems that taxes are top of mind for state legislators right now. While that’s the case, I’d like to add three more ways they could improve North Carolina’s tax code both to provide relief for taxpayers and to promote job growth and investment.
Eliminate the franchise tax
Repealing the onerous and destructive franchise tax would be a great next step.
The franchise tax is a tax on a business’s net worth. Making matters worse, businesses must pay the tax every year, even in those in which they lose money, punishing job creators when they can least afford it.
Additionally, the franchise tax is very complex, which places steep compliance costs on businesses, even those with no physical presence in the state. This complexity also can be used by the state Department of Revenue as a source for punishing honest mistakes and oversights with fines.
Despite all these disruptive effects, the franchise tax generates just a small fraction of state revenue. Numerous states over the past several years have recognized the harmful impact of a franchise tax and have repealed theirs, leaving North Carolina in a minority of states still imposing one.
The reasons for eliminating the franchise tax are numerous, and repeal would continue our state’s positive momentum and make North Carolina more competitive for investment vital to economic growth and the jobs that come with it.
Index the standard deduction to inflation
Since 2013, state legislators have more than doubled the personal income tax’s standard deduction, raising it from $7,500 for single filers to $15,750 and from $15,000 for married filing jointly to $31,500. The aggressive increase in the standard deduction means many more low-income North Carolina households owe zero state income taxes.
Moreover, that increase has outpaced inflation during that time, which increased a total of about 38 percent. Absent continued legislative increases in the standard deduction, however, an unchanging deduction can result in low-income workers being pushed into the taxable bracket even if their income is just keeping up with the pace of inflation (or worse, isn’t). In short, these workers may be no better off financially as inflation eats away at any income gains, but they nevertheless will begin owing taxes.
For instance, looking at a shorter, more recent time frame, the standard deduction has not kept up with inflation. From 2020 to 2025, the standard deduction increased by 18.6 percent, falling short of the 24.4 percent rise in inflation.
Increasing the standard deduction is a laudable way to lower the tax burden on North Carolina workers, especially those with lower incomes. To protect against the “inflation tax,” however, legislators should index the standard deduction to inflation, so that it automatically rises each year in accordance with cost-of-living increases.
This measure, of course, should not preclude more substantial standard deduction increases by the legislature, but it should serve as the minimum automatic increase to protect workers from being exposed to income taxation simply because their income is keeping up with — or even falling short of — the rising cost of living.
Eliminate capital gains taxation
Unlike the federal government, North Carolina taxes capital gains at the same rate as ordinary income.
Taxing capital gains is a double taxation of sorts: people are taxed when they earn income, make investments with that after-tax income, then are taxed again on any gains from that investment.
Eliminating the tax on capital gains would eliminate the bias against saving, investment, and entrepreneurship that still exists in North Carolina’s tax code. Savings and investment are the key ingredients to a growing economy, and growth is necessary for new jobs and higher wages.
The reduction in revenue to the state government from abolishing the capital gains tax should be partially offset by eliminating economic development programs that subsidize certain businesses, which amounts to hundreds of millions of dollars in tax giveaways every year.
Conclusion
North Carolina has a lot to brag about when it comes to its tax climate. Over the past dozen years, state legislators have transformed it from one of the least competitive states to one of the most competitive. It is recognized by national outlets as the best state in which to do business.
But now is not the time to rest on our laurels. There’s still more room for improvement. Other states have followed North Carolina’s lead and are catching up.
