Amid the uncertainty of state budget negotiations, one fact still holds: North Carolina’s corporate tax rates will continue to drop, and those cuts will improve the state’s standing in an index from the Tax Foundation in Washington, D.C., ranking state business climates.
The General Assembly passed a major tax reform in 2013 including a trigger provision to cut corporate tax rates further if tax collections hit a growth target of $20.2 billion by the end of the current fiscal year. Revenues forecast by the state budget office are expected to surpass that easily, reaching $21.4 billion.
The 2013 tax reform plan cut the corporate rate from 6.9 percent to 6 percent on Jan. 1, 2014, then to 5 percent on Jan. 1, 2015. By hitting the revenue target, further cuts will kick in, with the rate automatically dropping to 4 percent Jan. 1, 2016, and 3 percent Jan. 1, 2017.
The first round of cuts helped the Tar Heel State jump from 44th place to 16th place on the Tax Foundation’s Business Climate Tax Index. And thanks to the next rate cuts, North Carolina is poised to move even closer to the top of the list.
With a 3 percent corporate tax rate, North Carolina will jump from 25th place to 11th place nationally, bringing the state’s Business Climate Tax rank to 14th overall, said Scott Drenkard, economist and manager of state projects at the Tax Foundation.
By leaping 28 places on the index in 2013, North Carolina enjoyed the largest jump in rankings in the history of the index, according to the Tax Foundation. By 2017, it will have moved a full 30 spots up the list.
Additional tax relief will come to North Carolina from reduced unemployment insurance tax rates, thanks to the early repayment of more than $2 billion in unemployment insurance debt to the federal government.
The Tax Foundation cannot adjust its index calculations to model the impact of the UI repayment. But Gary Salamido, vice president of government affairs at the North Carolina Chamber, projects the state’s business climate will benefit greatly from the additional relief.
“Beginning in 2016, you’re going to see $2.5 billion going back into the economy,” Salamido said. “That’s $2.5 billion that’s suddenly freed from payments to the federal government.”
That extra money will go directly into the private economy, which should continue to foster business growth in North Carolina, Salamido said.
Kari Travis (@karilynntravis) is an associate editor of Carolina Journal.