North Carolina’s economy has been devastated by the decisions of Gov. Roy Cooper and state and local officials in their attempt to ameliorate the effects of COVID-19. To enforce social distancing rules, politicians outlawed a number of occupations and businesses. Included in these restrictions are restaurants and restaurant workers, beauty salons and barbershops, specialty stores, and the work of entertainers such as musicians, actors, and athletes.
Bringing the economic activity back to life will require a massive “get-out-of-the-way” effort by governments at all levels. The burden of taxation and regulation imposed by governments on businesses and workers is not easily shouldered in the best of times, but soon many businesses will begin rebuilding after months of reduced demand for their goods and services. The burdens of excessive taxation will make it even more difficult for them to do so.
Below I outline four separate proposals that will help to relieve the tax burden on workers and businesses and reinvigorate capital investment and economic activity in North Carolina. All of these proposed changes should be implemented for at least two years.
Suspend the tax on tips and gratuities
In North Carolina, tips and gratuities are taxed as regular income under the state’s personal income tax. All income taxes on tips and gratuities to workers in any industry should be suspended.
No one can deny that workers in industries that depend on tips for a large percentage of their incomes have been hit disproportionately hard by Cooper’s near shutdown of the economy. Indeed, many of them work in sit-down restaurants, beauty salons, and other segments of the service industry hit hardest by coronavirus mitigation measures.
A study by Payscale.com estimated waiters and bartenders take home about 60% of their total wages in tips. The governor’s orders have eliminated many of those positions. If for no other reason, suspending the tax on tips and gratuities would reward service industry workers for their extraordinary sacrifices during this crisis.
In addition, this tax exemption would increase take-home pay without burdening their employers. It would, in effect, raise wages without raising wage costs. Eliminating the income tax on tips and gratuities would make it easier for employers in these industries to attract former and new employees who may be reticent to return to work because of the perceived risks of contracting the COVID-19 virus. This would benefit both the workers in these industries and the communities they serve.
Suspend or abolish the franchise tax
North Carolina’s franchise tax discourages capital investment and should ultimately be repealed. But, at a minimum, it should be suspended for the next two years to help businesses get back on their feet.
As I have written elsewhere, North Carolina’s “franchise tax” is actually a business wealth tax similar to the personal wealth tax proposed by Bernie Sanders and Elizabeth Warren. It’s a tax on all plant and equipment owned by a business and, as such, discourages capital investment. Furthermore, because it’s not just a tax on added capital but on accumulated capital, it hits the same tax base year after year. The franchise tax is a punitive tax that shouldn’t exist in the first place and certainly shouldn’t be burdening our state’s recovery during these historically difficult times.
Allow all new investment in land and equipment to be written off immediately
For at least the next two years, the cost of any investment in land and equipment by a business of any size should not be subject to tax depreciation rules. One hundred percent of the money spent on capital expansion should be deductible from a business’s income in the year that the expenditures are made.
To give North Carolina’s economy a shot in the arm when it is needed most, all depreciation rules for businesses that write off purchases of capital equipment and land against income should be waved. This measure would encourage businesses to make investments in more durable, longer-lived equipment now and increase the tax deduction value of many investments.
Reduce the corporate income tax rate to zero
As I have noted in several previous JLF publications, all corporate taxes are actually paid by customers in the form of higher prices, workers in the form of lower wages, and shareholders/owners in the form of reduced capital gains and dividends. In other words, they penalize all sectors of the economy.
For the past seven years, North Carolina has been steadily reducing its corporate income tax rate. Between 2013 and 2020, it has fallen from 6.9% to 2.5 %, which is the lowest of any state that has a corporate tax. That said, the corporate income tax still imposes a burden on economic activity in the state, one that, even at this low rate, North Carolina businesses cannot afford. Suspending the corporate income tax, combined with the other business tax changes mentioned here, will go a long way toward clearing the path for a quick economic recovery.
This is no time for the state to be timid in attempting to free North Carolina’s economy from the shackles that have been imposed by elected officials. To bring back vibrant economic growth, North Carolina’s leaders must do more than simply lift the shutdown orders. Lawmakers must take bold steps to lift, if only temporarily, burdens imposed long before the current crisis. The proposals presented here would put our economy’s relaunch on a firm footing by reducing the cost of doing business and rewarding the workers who have sacrificed the most.
Dr. Roy Cordato is senior economist, emeritus at the John Locke Foundation.