RALEIGH – I understand why so much attention has been paid to fiscal-policy differences between Gov. Beverly Perdue and the Republican legislature. I’ve given them lots of attention myself.
But it’s worth taking a moment to underline a key agreement between the two sides: that North Carolina’s corporate-income tax is burdensome, complex, and harmful to the state’s economic growth.
In the budget plan she released in February, Gov. Perdue proposed reducing the tax on corporate income to 4.9 percent, down from the current 6.9 percent. The budget plan just passed by the North Carolina House assumes a similar reduction in the corporate-tax rate, although the phase-in period may end up being different when the House finance package makes its debut.
Both parties argue that reducing North Carolina’s corporate-tax rate will make the state more competitive and encourage job creation. Both offer empirical findings to buttress their claim, which is a modest one by the way – no one is suggesting that cutting corporate taxes will immediately create tens of thousands of jobs or anything like that.
So why include a $200 million to $300 million cut in corporate taxes in a plan to balance North Carolina’s budget? Because the corporate tax violates basic principles of simplicity, neutrality, and liberty.
Keep in mind that corporations are not people. They are best thought of as a bundle of contracts among various and changing groups of people, including shareholders, employees, vendors, and consumers. To tax “corporate” income is to reduce the incomes of these individuals, to a greater or lesser degree depending on how responsive they are to changes in the tax burden.
The corporate tax violates the principle of simplicity precisely because this issue of tax incidence is so complicated. Although some apparently believe that “corporate income” taxes are borne solely by rich executives and shareholders, recent research suggests that workers pay the largest share of the tax in the form of lower wages – because among the parties to the corporate contract they are the least able mobile.
Do workers realize they bear most of the cost of the corporate tax? No. That’s one reason the tax lacks transparency and should, eventually, go away.
The corporate tax violates the principle of neutrality because it favors debt over equity in business decisions. Because shareholders pay tax twice on returns from their investment – first at the corporate level and then again at the individual level – the tax code creates an artificial incentive for managers to borrow rather than raise money through stock offerings. This isn’t the only reason our economy exhibits excessive leverage, making it particularly vulnerable to the kind of financial shock we experienced in 2007-08. But it is among the most important.
Finally, the corporate tax violates the principle of liberty because it serves to increase the overall tax burden – and thus reduce the ability of North Carolinians to keep and spend what they earn. Previous JLF research has shown that states with more ways to tax tend to have higher overall tax burdens than states with fewer ways to tax. To reduce the size, scope, and cost of government, we should be shrinking the tax code and confining taxes to a smaller number of highly transparent levies. The more voters know about how much income they surrender to the government, the less amenable they are to future tax hikes.
I should hasten to add that not everyone in Raleigh thinks the corporate-income tax should decline. Some Democrats in the General Assembly want to keep the marginal rate at 6.9 percent and even raise the effective rate – how much the average corporate sends in (after credits and exclusions) divided by its taxable income.
These liberals find themselves outside the consensus formed by the Democratic Perdue administration and the Republican General Assembly. Not an enjoyable place to be.
Hood is president of the John Locke Foundation.