by Brian Balfour
Senior Vice President of Research, John Locke Foundation
At 2.5%, North Carolina has the lowest corporate income tax rate among the 44 states that impose one. It not only produces a tiny fraction of state revenue, but it also represents the most volatile source of tax revenue as well.
There are many compelling reasons to eliminate this small and unreliable source of state revenue. Foremost among them are fairness, economic growth, and the elimination of political corruption.
Following are the top three reasons why North Carolina should eliminate its corporate income tax.
Imagine being a competitor of one of the businesses receiving a state taxpayer handout. Your competitors are receiving millions in additional revenue not based on selling their products, but because of political privilege.
You are forced out of business, and people lose their jobs because you can’t compete against the cronies that get to add taxpayer handouts to their bottom line. How is that fair?
By eliminating the state corporate income tax, there would be little reason for the state to continue its patchwork of corporate giveaway programs like the Job Development Investment Grant (JDIG) and One North Carolina funds.
Funds like these unfairly award political privileges to those companies with the most influential lobbyists, giving them a competitive edge in the marketplace. Without a corporate income tax, state lawmakers would not need to try to lure companies with handouts to offset their tax burden.
Moreover, the state offers countless targeted tax breaks, which means some businesses and industries are granted political advantages. No corporate tax means no need for targeted tax breaks. Every corporation’s tax rate would already be zero.
A far better and fair incentive program would be to replace our state’s current web of targeted crony handouts and politically motivated tax breaks with the elimination of the state’s corporate income tax. Doing so would create the same tax-free environment for all corporations, creating a far more fair economic climate.
Research has shown that the state corporate income tax is the state tax most harmful to economic growth. Moreover, those most harmed by the corporate tax are workers, mainly in the form of lower employment and wages.
An October 2018 study released by the National Bureau of Economic Research found that “increases in corporate tax rates lead to significant reductions in employment and wage income.”
Specifically, the authors calculated that a one percentage point corporate tax increase leads to employment falling by 0.2% and total wage income falling by about 0.3%. The findings led the study’s authors to conclude that corporate tax rate increases are “uniformly harmful.”
In short, the state corporate income tax costs jobs and reduces worker pay.
Furthermore, the state’s current system of targeted corporate handouts has been found to be highly ineffective.
Investigative reporting by WRAL in 2019 found that companies receiving such handouts between 2009 and 2016 had “so far reported hiring just over half the jobs announced” under the state’s two largest incentive programs: the Job Development Investment Grant and One North Carolina Fund.
A stunning one-third of the incentivized projects failed to create a single new job.
Additionally, a recent research paper co-authored by Columbia and Princeton University economists could find no strong evidence that state and local government incentive packages “increase broader economic growth at the state and local level.” Instead, the paper suggested that, in fact, “the welfare effects of these subsidies might be negative on average,” meaning they might do more economic harm than good.
A 2019 academic report by High Point University economist Stephanie O. Crofton and Macrometrix research consultant Luis G. Dopico and released by the Civitas Institute found that eliminating North Carolina’s corporate income tax would create 43,000 more jobs over ten years. Furthermore, the state could expect overall average salaries to increase by more than $1,500 during that time.
Corporate tax elimination would generate more jobs and bigger paychecks for North Carolina workers.
Not only does our current system of targeted handouts and tax carve-outs not live up to its promised economic benefits, but it also creates a political culture ripe for corruption.
When politicians signal their willingness to dole out millions of dollars to hand-picked businesses, there’s no shortage of businesses lining up with their hands out. Naturally, those companies offering something of value to the politicians – and not always legal gifts – will go to the head of the line.
Want to reduce government corruption? Start by replacing the current system of corporate welfare “economic incentive” programs with an across-the-board zero corporate tax rate. The fewer things that politicians control, the less we have to worry about who controls the politicians.
It’s time to make North Carolina’s economy fair and attractive to all job creators. It’s long past time to eliminate the culture of corruption in Raleigh that comes with cronyism. Repealing the corporate tax will also improve upon North Carolina’s decade of success and signal to job creators that the Tar Heel state is open for business.
The corporate tax only generates about 4.5% of total state General Fund revenue, and it is the most volatile form of revenue. Compensating for the lost revenue could easily be achieved largely through a combination of eliminating corporate welfare taxpayer handouts, increased revenue growth from other taxes due to increased economic activity, and eliminating pork spending.
Corporate tax elimination would not only create a fair playing field, but also facilitate greater economic growth and reduce political corruption as well.