The economic costs of corporate tax incentives outweigh their benefits, a new study by N.C. State University researchers says.
The study focused on three types of tax incentives — investment or job creation tax credits, property tax abatements, and research and development tax credits.
Though perhaps the best known incentive, job creation or investment credits — such as those for Amazon’s HQ2 — don’t have the worst impact. The study argues research and development grants, which tend to create growth for the national economy while leaving local communities behind, have the most negative effects.
What does all of this mean for North Carolina? We’re ahead of the game, simply put.
In 2013, the state passed a tax law establishing a lower, flat tax rate for personal income, lowered the corporate tax rate to the lowest in the Southeast, and placed expiration dates on popular corporate tax credits, including the research and development tax credit which was set to expire in 2016.
Researchers argue tax incentives aren’t inherently bad, but they carry substantial risk legislatures fail to avoid. Mark Robyn, an officer for Pew Charitable Trusts, explains they can control costs by “setting caps, requiring companies to meet specific benchmarks, and funding incentives through budget appropriations rather than open-ended commitments.”
North Carolina was once again ahead of its counterparts. In 2015 the state allowed the motion picture production tax credit to expire. The next year, the tax credit was replaced by the Film and Entertainment Grant Fund, establishing a spending cap and placing money in the budget through the appropriations process. The earlier tax credit scheme did neither of these.
“This study is a good reminder of the positive steps taken by the legislature since 2013 to simplify and reduce the tax burden for all companies with lower rates,” said Joe Coletti, senior fellow at the John Locke Foundation. “It also raises more questions on the value of those tax credits and grant-based incentive programs that do remain.”
Iowa, Louisiana, New Mexico, New York, and Pennsylvania are among the states that use incentives the most. Additionally, these states all impose higher corporate tax rates; Iowa levies the country’s highest corporate tax rate.
North Carolina took the hint years ago that tax reform rather than tax incentives creates economic growth. The N.C. State study suggests other states that want similar results should do the same.