If state legislators can convince Gov. Roy Cooper to support the new budget, North Carolina will become the 13th state to enact a personal income tax cut this year, the third signed into law by a Democratic governor. That personal income tax cut is expected to be included in the new compromise budget currently being worked out in the conference committee.

In addition to a personal income tax cut that will provide relief to families and small businesses, a state corporate tax cut that increases the job-creating and sustaining capacity of larger employers could also be part of North Carolina’s new budget. The North Carolina House-passed budget cuts the corporate income tax, which currently stands at 2.5%, while the budget approved by the Senate phases out the tax entirely.

Given the unusual fiscal situation in which the state finds itself awash in surplus cash, much of it one-time revenue, some in Raleigh are concerned that now may not be the best time to phase out the corporate income tax. Yet there is a mechanism by which North Carolina legislators and Gov. Cooper could phase out the corporate income tax in a manner that addresses and assuages these legitimate concerns about future revenue. The mechanism involves revenue triggers, which have previously enabled North Carolina lawmakers to get the corporate rate down from 6.9%, which had been the highest corporate rate in the region, to 2.5%, which is now the lowest corporate tax in the country.

“Well-designed triggers limit the volatility and unpredictability associated with any change to revenue codes, and can be a valuable tool for states seeking to balance the economic impetus for tax reform with a governmental need for revenue predictability,” writes Jared Walczak, the Tax Foundation’s vice president of state projects. “Some triggers are designed to target a certain degree of revenue growth, while others operate within a framework of overall reductions or seek to maintain revenue neutrality.”

If Cooper or any legislators are worried about future revenue shortfalls that might be exacerbated by a corporate tax cut, making corporate tax reduction contingent upon future revenue triggers is a great way to ameliorate that concern. If revenue collections don’t achieve the desired levels in the coming years, the corporate tax phase-down simply would not occur under a revenue trigger-facilitated tax cut. Revenue triggers are the mechanism by which legislators and governors can significantly cut taxes and avoid becoming “the next Kansas.”

The revenue trigger-facilitated corporate tax reduction enacted in North Carolina over the past decade has been so successful, bringing down the corporate rate while the state experienced repeated budget surpluses, that other states have since copied the approach. Imitation is among the highest forms of flattery, so the saying goes, and other states have been busy flattering North Carolina.

Recent years have seen more than a dozen states and the District of Columbia enact tax relief contingent upon revenue triggers. Cooper and state legislators could once again utilize revenue triggers to make North Carolina only the third state with no corporate income or gross receipts tax.

Phasing out North Carolina’s corporate income tax would make the state a more profitable place to do business and thus more economically competitive. Yet the benefits of corporate tax relief extend beyond corporate shareholders to the workers themselves, since they bear some of the corporate tax burdens. This helps explain why corporate tax rate reduction was a shared goal of both Barack Obama and Donald Trump. The Tax Foundation’s Stephen Entin estimates that labor (workers) bear approximately 70 percent of the corporate income tax burden.

“Over the last few decades, economists have used empirical studies to estimate the degree to which the corporate tax falls on labor and capital, in part by noting an inverse correlation between corporate taxes and wages and employment,” Entin writes.  “These studies appear to show that labor bears between 50 percent and 100 percent of the burden of the corporate income tax, with 70 percent or higher the most likely outcome.”

A University of Warwick and University of Oxford paper published in 2012 found a $1 increase in the corporate tax depresses wages by 92 cents over the long term. This study —  conducted by Wiji Arulampalam, Michael P. Devereux, and Giorgia Maffini — analyzed more than 55,000 businesses across nine European countries from 1996-2003:

“We identify this direct shifting through cross-company variation in tax liabilities, conditional on value added per employee,” note the University of Warwick & Oxford researchers. “Our central estimate is that $1 of additional tax reduces wages by 92 cents in the long run. The incidence of a $1 fall in value added is smaller, consistent with our wage bargaining model.”

The same year that paper was released, Mihir A. Desai published a Harvard Business Review piece concluding that corporate tax hikes fall “straight on the back” of the American worker by depressing real wages:

“Because capital is mobile, high tax rates divert investment away from the U.S. corporate sector and toward housing, noncorporate business sectors, and foreign countries,” Desai writes. “American workers need that capital to become more productive. When it’s invested elsewhere, real wages decline, and if product prices are set globally, there is no place for the corporate tax to land but straight on the back of the least-mobile factor in this setting: the American worker.”

Three years later, economists Kevin Hassett and Aparna Mathur published a 2015 study finding that a 1 percent hike in corporate tax rate leads to a 0.5 percent drop in wage rates. That study analyzed 66 countries over a quarter-century, concluding that the federal government will generate new revenue from a corporate income tax increase, but that the revenue growth will be less than the decline in workers’ wages.

“We find, controlling for other macroeconomic variables, that wages are significantly responsive to corporate taxation,” writes Hassett & Mathur. “Higher corporate tax rates depress wages.”

A 2006 Congressional Budget Office study by William Randolph found that 74 percent of the corporate tax burden is borne by domestic labor:

“Burdens are measured in a numerical example by substituting factor shares and output shares that are reasonable for the U.S. economy,” Randolph writes. “Given those values, domestic labor bears slightly more than 70 percent of the burden of the corporate income tax.”

It’s clear that economists across the political spectrum agree that the burden of the corporate income tax is borne by workers, the only disagreement is over the share. Even the left-of-center Tax Policy Center projects that 20 percent of the corporate income tax burden is borne by labor.

Aside from the fact that a state corporate tax cut would benefit both workers and employers, cutting or phasing out the state corporate tax is even more prudent at this time in light of the pending federal corporate income tax hike being pushed by President Joe Biden and congressional Democrats. Currently, North Carolina would be the only state in the southeast with a combined federal and state corporate income tax below 30% after accounting for President Biden’s proposed corporate rate hike.

By utilizing revenue triggers, North Carolina lawmakers and Cooper could reduce or phase out the state corporate tax in a manner that will make North Carolina more globally competitive, even in the face of a federal corporate tax hike, while avoiding the prospect of future budget shortfalls.

Legislators and governors in states across the country have decided they want to be “the next North Carolina,” not “the next Kansas,” and have demonstrated this by following North Carolina’s lead in enacting tax relief contingent upon revenue triggers being met. The concern about what future state revenue looks like when tax collections return to a more normal trajectory is understandable. North Carolina lawmakers can address this legitimate concern while improving the state tax climate by enacting a phaseout of the state corporate tax that is contingent upon future revenue targets being met. This is an approach that has worked before and it is well suited for the current situation. By signing a corporate tax cut into law, Cooper could make clear that he, like Barack Obama before him, recognizes that the corporate tax burden is paid for by workers and should come down.

Patrick Gleason is vice president of state affairs at Americans for Tax Reform and a senior fellow at the Beacon Center of Tennessee.