Elimination of the corporate income tax will hurt North Carolina

More than 60 percent of North Carolinians oppose eliminating the corporate income tax. In fact, most North Carolinians want to see profitable corporations contribute what they owe to ensure we can fund a better future for people across our state.

As the final state budget nears completion, legislative leaders and the Governor should listen to the people and keep in place an income tax on corporate profits, to ensure a just recovery from this pandemic and strengthen the health of communities for the long-term.

But will North Carolina policymakers listen to the people and plan for the future, or will they continue to legislate for the powerful few and lock future generations into a governance model that holds North Carolina back?

Here is the reality of just who will benefit and who will be hurt if policymakers refuse to choose a better future for North Carolina:

Who benefits from corporate income tax elimination? Elimination of the corporate income tax would send the vast majority of the $900 million annual tax break to shareholders out of state. Estimates suggest that less than 20 percent of the corporate income tax rate cut would stay with residents. Of those small number of shareholders in North Carolina, 69 percent of the next tax cut will go to the richest 20 percent of taxpayers.

The vast majority of profitable corporations benefiting will be out of state corporations. 68% of corporate income tax paid in North Carolina comes from large corporations that get less than 25% of their income from NC. These corporations don’t pay income taxes based on payroll or property in NC  –just sales — so further reductions to the rate don’t give them any additional incentive to expand or create more jobs here.  Nor does it give them an incentive to move existing out-of-state jobs and facilities to North Carolina; the vast majority of other states also tax corporations only in proportion to their sales, so their tax liability to those states doesn’t change if they move here.  Such moves are rare, in any case.

That is also why corporate tax cuts do not lead to economic growth. As research has found, the impact of tax cuts on corporate investment would not only be small, but require years to fully take effect.  Even with a very large reduction in total state and local taxes paid by businesses, to see even a de minimis change in economic output and employment, North Carolina would have to hold constant public investments in schools, infrastructure, and other public goods that private business rely on – which will be very challenging to accomplish if the corporate tax is eliminated.

Who is hurt by corporate income tax elimination? Elimination of the corporate income tax would reduce state revenue by roughly $900 million annually.  Those are dollars that wouldn’t be available to support the public schools, public health, and other public goods that ensure people and communities are doing well and that businesses have the well-educated workers and good roads they need.

1. Children: The state’s failure to comply with the Leandro funding plan for early childhood education and K-12 would be at serious risk in future years when funding requirements to support a sound, basic education in North Carolina ramp up just as tax cuts get scheduled to go into effect.
2. Small, local businesses: The reality is that not that many businesses pay the corporate income tax because they choose to organize in other ways, aren’t profitable, or benefit from many tax loopholes and use tax avoidance strategies. Without public dollars to invest in the technical assistance, access to capital, and other supports to small, local businesses, North Carolina’s growth model isn’t building wealth locally.

When corporations don’t pay their share, the lack of revenue would mean cuts to the public institutions that support a good quality of life in North Carolina – unless the revenue is made up in other, less equitable ways. Making up for the lost revenue from all income tax cuts being proposed would require more than doubling the current sales tax rate, which would put more taxes on the backs of everyday North Carolinians instead of corporations.

Everyone in North Carolina is ultimately hurt by the shortsighted decision to privilege the interests of powerful, profitable businesses over the people in our state today and future generations.

Alexandra Forter Sirota is the Director of the Budget & Tax Center, a project of the NC Justice Center.