Budget & Tax Center: Another cut for big business that will reduce revenue for schools, communities

N.C. Senate finance leaders are moving a tax cut bill for businesses with high net worth this week, even as the legislature has failed to put forward a comprehensive investment plan addressing the priorities of communities across the state.

That’s right. There is no final, comprehensive budget for our communities, but legislative leaders in the Senate will still give tax breaks to big companies.

Senate Bill 578 will adopt the franchise tax cuts proposed in the legislative budget at a time when corporations across North Carolina are paying the lowest corporate income tax rate applied to their profits in any state that taxes corporate income.

As the Budget & Tax Center detailed in an earlier analysis, this is not a tax cut that will reach the majority of businesses in North Carolina, and like corporate income tax cuts before it, it is unlikely to change the decisions of businesses around hiring or location.

There are numerous rigorous studies of the issue to confirm that the theory behind such claims hasn’t played out in reality: Businesses aren’t going to relocate en masse because of a franchise tax cut.  This makes sense given what researchers have noted as the real-world problems with suggesting that a tax cut for business will deliver new economic activity.

1. When businesses get a tax cut, particularly at the state level, that means that other people will have to pay in the form of higher taxes or spending cuts. Balancing out the net effect on the economy has led most researchers to conclude that even new economic activity doesn’t replace those dollars or minimize the harm of the tax shifts and spending cuts that result from the loss of revenue.
2. All state and local taxes paid are a very small share of businesses’ total expenses, estimated at between 2 and 4 percent. That means even substantial tax cuts will have little effect on profitability.
3. Relocation decisions are rare and not the primary source of job creation in a state. And most researchers have found that relocation decisions are more likely driven by proximity to markets or suppliers, quality of roads and transportation networks and availability of workers, for example.

Perhaps the most pernicious false claim around this and all tax debates in North Carolina is that tax cuts will generate more revenue by driving greater economic activity.

The reality, of course, is North Carolina will have less revenue because legislative leaders chose to cut franchise taxes for companies, particularly companies with net worth over $20 million from which most franchise taxes are collected.

The legislature’s Fiscal Research office estimates the franchise tax provision will reduce revenue by $240 million in the first year, and grow to $270 million in Fiscal Year 2023-24.

Those dollars could make significant progress toward pressing needs for everyday North Carolinians by:

• Making child care more affordable
• Investing in affordable housing development
• Supporting home health care and services for the state’s older population
• Monitoring the quality of our air and water and the level of regulation needed to more adequately protect against toxic dumping

North Carolina leaders have not prioritized these pressing needs for North Carolinians in their piecemeal budget approach, but they appear certain to continue to deliver a piece to big companies.

Alexandra Forter Sirota is the director of the N.C. Justice Center’s Budget & Tax Center.