RALEIGH — Gov. Mike Easley is readying a tax-cut proposal for the short session of the North Carolina General Assembly that will convene next week. The bad news is that Easley’s version of tax reduction to improve the state’s business climate is not ideal.
But in government, what is?
The good news is that the governor is offering a nod to both political and economic reality here by proposing tax cuts to boost North Carolina’s still-lethargic economic recovery. While some politicians and commentators are continuing to splash about in da Nile, to which they were lead by some erroneous fiscal cartography, most of the rest of us figured out a long time ago that North Carolina’s marginal tax rates are serving as a disincentive to invest and build businesses in our state.
Certainly most business leaders pick tax rates as a major impediment to economic growth. Judging by some polling I’ve seen and recent electoral outcomes in other states, I’m guessing that the voting public agrees. Now Easley, who I’m compelled to point out has worsened our tax burden during most of his tenure, is offering some constructive suggestions that I hope will get serious deliberation in the legislature.
As previously noted, the governor’s package isn’t ideal. The centerpiece would exempt the first $20,000 of income from the corporate tax rate of 6.9 percent, saving business owners and stockholders about $48 million a year. Generally speaking, it is better to levy a lower tax rate on a larger tax base rather than a higher tax rate on a smaller tax base. Ideally, then, we should cut the marginal tax rate rather than enact an exemption. But as a second-best option, the $20,000 exemption has the virtue of removing lots of smaller businesses from the corporate-tax rolls altogether — a result worth cheering because corporate taxes constitute a double-tax on income. First earnings are taxed at the corporate level and then they are taxed again at the individual level when distributed as capital gains or dividends.
While lawmakers in Washington have actually been working to reduce this bias, first with a lower federal rate for capital gains and most recently with a federal tax cut on dividends, North Carolina has done nothing to rationalize its own state code, which imposes some of highest marginal rates of double-taxation in the nation. The Easley proposal will reduce the problems somewhat, and eliminate it for smaller businesses organized as “C” corporations. (“S” corporations already escape double-taxation by law but can be cumbersome to administer.)
The governor’s package has some other useful elements, including a state tax break for the new Health Savings Accounts included in last year’s federal Medicare bill and a proposed streamlining of North Carolina’s regulatory process, which business executives also cite as a major growth impediment. The rest of Easley’s economic-development ideas, involving more specialized business subsidies and mucking around in the free market, deserve a markedly different response not in keeping with today’s upbeat theme, so I’ll just skip them.
We’ll know that the governor is serious about getting these tax cuts enacted, not just covered by the media in an election year, if he offers budget savings in the coming days to offset their fiscal impact and balance the budget without the “offsetting” tax increases on cigarettes or alcohol some are suggesting. And we’ll know how serious state legislators are about fostering economic growth if they at least call his opening tax-cut offer, and preferably raise it.
Hood is president of the John Locke Foundation and publisher of Carolina Journal.