Tax reform advocates have found much to like in some key provisions to a broad tax package proposed by three state Senate leaders in March.
Sens. Bob Rucho, R-Mecklenburg, Bill Rabon, R-Brunswick, and Jerry Tillman, R-Randolph, proposed a bill that, in addition to lowering the personal and corporate income tax rates, would also make changes to the state’s franchise tax and would introduce a “single sales factor” when apportioning some taxes levied on businesses.
“The fact that Rucho’s bill lowers the rate I think [is] good policy,” said Scott Drenkard, an economist and manager of state projects at the Tax Foundation in Washington, D.C.
The bill would lower the franchise tax rate — imposed on all businesses operating in North Carolina — from $1.50 per $1,000 to $1.35 per $1,000. It would raise the minimum franchise tax from $35 to $200. For holding companies, the bill would double the maximum franchise tax from $75,000 to $150,000.
“You’re talking about some big companies that own subsidiaries,” said Jonathan Tart, a staff member of the General Assembly’s Fiscal Research Division, of the companies affected by the holding company provision. “There are only 70 or so of those companies that exist.”
Rucho said that raising the minimum franchise tax merely adjusted the amounts to account for inflation. Tart said the minimum amount hasn’t been increased in at least three decades.
Rucho said raising the minimum franchise tax while lowering the rate should be “a wash” when it comes to the revenues coming into state coffers. Tart said that while the changes “certainly offset each other,” he didn’t have specific projections of the effect of the franchise tax’s change on state revenues.
Drenkard said that when the Tax Foundation was researching the state’s tax laws in 2012, the franchise tax was unpopular.
“People called it a tax on breathing,” Drenkard said. “The franchise tax, which is on net assets, can be frustrating for businesses that have smaller profits but have larger capital on their balance sheets.”
Drenkard said franchise taxes could eat up a business’ cash flow.
Gary Salamido, vice president of government affairs at the North Carolina Chamber, said the chamber has a longstanding preference for simplifying, reducing, or eliminating the franchise tax.
He said the chamber’s tax committee is taking a look at the provision increasing the minimum franchise tax. “We have to be careful that we don’t inadvertently put a strain on small businesses,” Salamido said.
Salamido said the chamber likes the change to a single sales factor, saying it would make the state more competitive.
Currently, some business taxes on larger, multistate companies are assessed on three factors: the amount of property it owns in North Carolina as compared to its overall property holdings; the proportion of salary it pays its North Carolina employees; and its proportion of sales in North Carolina. The bill would change the law to base the tax predominantly on sales, rather than all three factors.
“It sends a great message to in-state companies to expand and out-of-state companies to come here,” Salamido said.
“There’s no disincentive to expanding your operation in North Carolina if your tax is just based on sales,” Drenkard said.
Drenkard said that a lot of states are moving toward adopting single sales factor tax policies.
The tax proposal got mixed reviews last month when the three senators introduced it.
Donald Bryson, state director for Americans for Prosperity-North Carolina, said he was encouraged that the Senate leaders were trying to deliver tax relief to workers and job creators. “Taxing income is a problem that actually slows economic growth,” Bryson said.
Roy Cordato, vice president for research and resident scholar at the John Locke Foundation, sounded a cautionary note. While he said he liked tax cuts, he questioned the timing, given that the General Assembly just enacted tax reform and cuts two years ago.
“The point is to protect the tax cuts that we got and the reform that took place in 2013, and with an eye toward more tax cuts down the road,” Cordato said. He suggested that instead of cutting tax rates now, the legislature should concentrate on building the state’s rainy day fund as an insurance policy in case of a recession. Currently, North Carolina has $652 million in its rainy day reserve fund, amounting to 3.2 percent of the state’s general fund. The state mandates that local governments to keep 8 percent of their annual budgets in reserves.
Barry Smith (@Barry_Smith) is an associate editor of Carolina Journal.