Except when complaining that North Carolina isn’t giving enough targeted tax incentives to Hollywood studios, solar-panel manufacturers, and commercial real-estate developers, liberals contend that cutting taxes on business has no effect on business starts, corporate relocation, or job creation.
They are mistaken. Fortunately for North Carolina’s economy, lawmakers are properly ignoring their mistaken views.
Until this year, our state’s corporate income tax rate was 6.9 percent. When added to the federal tax rate, which works out to 32.8 percent when adjusted for deductibility by the Organization for Economic Cooperation and Development (OECD), that put North Carolina at a serious disadvantage compared to locations in Europe (where combined corporate rates average 26 percent) and Asia (28 percent). Admittedly, corporations don’t typically pay the published tax rate, due to various exclusions and exemptions. But this happens around the world, not just in the U.S. When two University of Calgary researchers adjusted for actual collections from direct and indirect corporate taxes, they found that America still had the highest effective tax rates.
Tax rates are far from the only consideration in business decisions. Otherwise all corporations would relocate to Ireland (with a rate of 12.5 percent) or Slovenia (17 percent). Still, it is the height of folly to assume that we can afford to ignore the corporate tax burden when it is lower in every other industrialized country, often by 10 percentage points or more, as well as in many American states.
In addition to common sense, we have a large collection of empirical literature to go on. Since 1990, academic journals have published at least 82 studies of state corporate or business taxes. In two-thirds of them, higher tax burdens were associated with weaker economic performance on such measures as job creation and wage growth.
That’s why Gov. Pat McCrory and the legislature decided to act. In the tax-reform plan enacted last year, North Carolina’s corporate tax rate fell to 6 percent in 2014. If state revenue targets are met, it will continue to fall by a point a year through 2017, when at 3 percent it will be half the national average rate and significantly below that of our neighbors.
Internationally, North Carolina is on a path to having a combined marginal rate of 35.8 percent, lower than Japan’s 37 percent and within a few points of France’s 34 percent and Germany’s 30 percent. Unfortunately, state tax relief alone can’t get us down to the tax rates corporations pay in Canada (26 percent), the Netherlands (25 percent), Sweden (22 percent), or Britain (21 percent). Congress and President Obama need to stop posturing and start acting on federal tax reform.
Still, it represents a welcome step in the right direction — and not just for economic growth. To tax corporate income is actually to tax three groups: shareholders, employees, or customers. When corporate taxes hit shareholders, they impose an extra layer of income tax on dividends or capital gains that are already taxed at least once (if investors have their shares in tax-deferred accounts) and often twice (if investors pay personal taxes on both the principal and the returns).
And when corporate taxes hit workers as lower pay or customers as higher prices, they do so in a opaque manner. Workers don’t know that they are receiving lower wages or fewer benefits because of the corporate tax. Customers have even less of a sense that what they pay at the register is related to taxes levied up the supply chain.
Taxes ought to be as transparent as possible, so voters can evaluate whether the government services they receive are worth the price they pay for them. At the state level, I believe that principle argues for relying as much as possible on a flat-rate tax on consumed personal income (savings ought to be exempt to avoid double-taxation) so that taxpayers get an annual accounting of the bulk of what they paid in state taxes.
North Carolina’s corporate tax rate is dropping. That will bring more jobs and higher incomes for North Carolinians, as well as greater transparency in taxation. Good news all around.
Hood is chairman of the John Locke Foundation.