Earlier this year, North Carolina legislators got a good start on reforming the state’s antiquated tax code. They deserve praise for being willing to act — not just talk as many have done — about doing the really hard policy work. These reforms are helping put North Carolina back on a track toward long-term prosperity. So what should legislators do next? JLF’s Roy Cordato makes reform recommendations here.
Future reforms should focus on the income tax base, Cordato said. “This year’s reforms did not address the problem of the income tax’s penalty on all forms of investment,” he explained. “Money saved or invested is taxed first as income and then taxed a second time as earnings when the savings or investment yields interest, dividends, or capital gains.”
Lawmakers can address that issue by removing either principal or interest from the tax base, Cordato said. “The John Locke Foundation has recommended addressing this issue through new universal savings accounts, USAs, that would exempt all deposits from taxable income while taxing any withdrawals,” he said. “Another option would be to lower or eliminate the tax on capital gains.”
On the corporate income side, North Carolina leaders dropped the tax rate from 6.9 percent, highest in the Southeast, to 6 percent in 2014 and 5 percent in 2015. The rate could drop as low as 3 percent in 2017 if the state meets revenue targets.
“Unlike the current corporate income tax, which combines a high rate with special breaks for favored businesses and industries, new lower rates will apply across the board,” Cordato said. “Loopholes and giveaways embedded in the current system, based on what is essentially a crony capitalist model, are eliminated.”
Future reform should focus on abolishing the corporate income tax, Cordato said. “It’s a hidden tax, and it creates a drag on the state’s economy by placing an additional layer of taxation on investment,” he said. “Lawmakers should repeal the legislation that enables the state to tax corporate income at all. This would make it difficult for future legislatures to reinstate the tax.”
