RALEIGH — A bill before the North Carolina Senate would create a new state tax credit for small businesses that get the federal New Markets Tax Credit, if they decide to make these federally credited investments in North Carolina. The idea would be to further incentivize investment in poorer areas in the state.
The small businesses already would be qualified for the 39 percent tax credit, spread out over seven years, on their investments. They have to satisfy federal definitions in making “Qualified Equity Investments” in “Qualified Community Development Initiatives.” Furthermore, they must have fewer than 500 employees and locate in a high-poverty county.
The state tax credit that would be established under Senate Bill 522, “New Market Jobs Act,” would be styled technically as a “reduction” to the qualifying small business’s state premium tax liability, though it would “be afforded the same property and contractual protections as a credit.” It would be worth 58 percent of the investment and also spread out over seven years. (No credit would be claimed in the first two years, an 11 percent credit would be claimed each year in the third and fourth years, and a 12 percent credit would be claimed each year in the remaining years.)
If the state has enough tax credits available, they apparently could be allocated to the investments of small businesses that haven’t received the federal credits.
The introduction of S.B. 522 shows how difficult it can be to prevent special-interest exemptions and targeted credits from creeping into the tax code even as lawmakers pledge fidelity to the principles of a simple, evenhanded tax system with low rates that makes no attempts to pick winners and losers.
The tax reform package of 2013 eliminated several tax credits as (among other reforms) it lowered the rates and broadened the bases of corporate and personal income taxes.
Those reforms are empirically proven ways to boost economic growth, alongside regulatory reform and transportation reform. The beneficial effects of these recent changes are slowly beginning to emerge.
It would be hasty and self-defeating for state leaders to return to questionable economic practices, awarding tax credits to select companies for particular activities while effectively charging higher tax rates on other companies.
(A separate but related issue involves the ongoing debate over incentives targeting the film industry, which will — and should — disappear at the end of the year if lawmakers take no action during the current legislative session.)
If state leaders are unhappy with the pace of increased investment, economic growth, and job creation, then they should consider scrapping the corporate income tax altogether — which would be an all-comers economic development incentive, cutting the tax for everyone without playing favorites.
Jon Sanders (@jonpsanders) is director of regulatory studies for the John Locke Foundation.