RALEIGH – The business-tax bugaboo has reared its ugly head again.
A bugaboo is “an object of obsessive, usually exaggerated fear or anxiety.” It can also be defined as “a recurring or persistent problem.” Originally, the Celtic term “bucca-boo” referred to a goblin or other mythical monster. All three meanings apply well to the seemingly endless debate in Raleigh about the nature and extent of the business-tax burden.
The latest twist came last week when the Winston-Salem Journal ran a story on an analysis by the North Carolina Budget & Tax Center. My friends at the center were responding to the NC Department of Revenue’s release of a list of “tax expenditures.” The center concluded that in the 2004 tax year, businesses in the state “should” have paid $2.7 billion in taxes. Instead, thanks to special exclusions and credits, they paid only $1.7 billion. Thus businesses fared far better from state tax expenditures, worth 36 percent of their tax liability, than did individuals, who saved only 9 percent on the $8.6 billion they “should” have paid.
I know what the Budget & Tax Center was trying to get at here, but the execution is wanting. For one thing, there’s the basic problem of distinguishing “business” taxpayers from “individual” taxpayers. Businesses are bundles of contracts, not anthropomorphic beings. Individual shareholders, workers, and consumers bear the incidence of business taxes. One could certainly argue that, in particular cases, business taxation hits higher-income individuals, since they are more likely to own corporate stock. But in other cases, lower-income consumers or workers bear the brunt.
Second, to compare the nominal tax rates of corporations with those of individuals, as the center does, is fundamentally to misstate reality. All corporate income is already taxed as personal income – either immediately, in the form of taxable dividends or capital gains, or eventually, as tax-sheltered savings is withdrawn to be spent. To oversimplify for a moment, corporate income would bear a state marginal tax rate in North Carolina of as much as 8.25 percent even if the statutory rate on corporate income were zero. (Of course, companies doing business in North Carolina often have shareholders from across the country or the world, but that just means that the rate and type of taxation varies, not that corporate income escapes tax.)
Third, and more critically, the center and its business-lobby critics are all making the assumption that the Department of Revenue’s list of tax expenditures is a meaningful starting point for debating tax burdens. It is not. The report lists only tax credits or exclusions that are imbedded in state law. By far the largest exclusions from income taxes are found in the federal definition of taxable income, which excludes the value of non-wage benefits such as health insurance, money spent on mortgage interest, charitable contributions, and many other things. Similarly, there is no statute specifically excluding law firms, hospitals, and other major service providers from having to collect sales taxes, thus the exclusion is not listed. But these exclusions are much, much more significant, both in dollars and in economic implications, than are most of the piddly “tax expenditures” listed by Revenue. Indeed, many of the latter aren’t truly tax expenditures. They are attempts to correct past errors in tax-base definition. For example, several are exemptions of certain business-to-business purchases from the retail sales tax. There shouldn’t be any business-to-business purchases in the base of a retail sales tax in the first place, at least for businesses that sell taxable goods.
Finally, North Carolina’s business taxes are not low by national standards, as the center claims. They are not sky-high by national standards, either, when fully accounted for, though our taxes are certainly higher than most of our neighbors.’
Perhaps I’ve used the wrong term: these business-tax myths aren’t bugaboos. They are Bugaloos – “They’re in the air and everywhere/Flying high! Flying low!”
Hood is president of the John Locke Foundation and author of Selling the Dream: Why Advertising is Good Business. He’ll be talking about the book Monday at a Raleigh luncheon.