Study: N.C. Business Tax Climate Improving
RALEIGH — Existing businesses in North Carolina are taxed at rates below the national average, and new firms generally benefit from tax rates beneath national norms, making the Tar Heel State an attractive place to do business, a new study concluded.
Indeed, of the seven business categories modeled in the just-released Tax Foundation study Location Matters: The State Tax Cost of Doing Business, North Carolina was ranked in the Top 10 states in three categories, and Top 20 in the other four.
“This is a great measure for North Carolina lawmakers to take into consideration when they look at new regulations that hinder new and existing businesses,” and for guiding tax policy to achieve maximum economic development in the future, said Sarah Curry, director of fiscal policy studies at the John Locke Foundation.
“North Carolina has seen improvement, and will continue to see improvement under the tax reform package that has been enacted,” said Jared Walczak, Tax Foundation policy analyst and author of the study.
Because the study reflected data collected as of April 2014, additional tax reform measures taking effect after that date were not captured in this study.
Walczak said one of the most significant findings of the study for North Carolina was that there was relative tax neutrality across different firm types, meaning “most firms in North Carolina are paying fairly similar tax rates.”
In many states the tax code is designed to pick winners and losers among various types of industries, and “that’s not happening to a significant degree in North Carolina,” Walczak said.
For the most part, new and mature businesses are treated similarly by the tax code.
“That’s largely because North Carolina is not focusing substantially on using incentives to bring new firms in,” Walczak said.
Rather than offsetting large incentive giveaways to new firms with higher taxes on existing businesses, state lawmakers have chosen “to provide lower overall tax rates, and provide opportunities to firms with a longer time horizon to enjoy lower tax rates,” Walczak said. That helps new firms to launch and survive difficult start-up years.
“No one is experiencing a fairly high tax burden,” Walczak said. Unlike many states, North Carolina does not have a “massive property tax burden,” and its corporate tax rate is “modest.”
According to the study, Tax Foundation economists designed seven model firms, and tax specialists with KPMG, an audit, tax, and advisory firm, calculated what each firm’s tax bill would be in each of the 50 states, both as a new company eligible for tax incentives, and as a mature firm at least 10 years old.
Taxes on corporate income, property, sales, unemployment insurance, capital stock, inventory, and gross receipts were figured into the computations.
Every mature firm category in North Carolina ranks between fifth- and 19th-best nationwide. But even North Carolina’s worst ranking — the mature labor-intensive manufacturing operation, with an effective tax rate of 7.3 percent placing it at No. 19 nationally — is still 20 percent below the median rate nationwide.
“In North Carolina, the corporate income tax is responsible for 29 to 52 percent of the overall tax burden for new firms, in part due to double-weighted sales factor apportionment and the state’s unfavorable sourcing rules,” the study said. “As such, the continued implementation of the state’s tax reform package could have a meaningful impact on effective tax rates not fully captured here.”
While new firms “generally experience below-average effective tax rates as well,” the study said, less generous incentives are being offered due to tax reform.
“The new research and development facility, for instance, faces modest sales and [unemployment insurance] tax rates, and property taxes are notably lower than in most other states. Those states that have lighter tax costs than North Carolina for R&D operations often do because of substantial subsidies for research and development operations which are not available in North Carolina,” the study said.
The seven model firms tested by the Tax Foundation were a corporate headquarters, a research and development facility, an independent retail store, a capital-intensive manufacturer, a labor-intensive manufacturer, a call center, and a distribution center.
According to the table of North Carolina’s effective tax rates in the study, the seven model firms had the following mature firm rankings nationally, with the tax rate percentage of the mature firm listed first, followed by the new firm tax rate percentage:
• Corporate headquarters, No. 5 (10.4 percent, 6.9 percent).
• R&D headquarters, No. 16 (8.9 percent, 10.7 percent).
• Retail store, No. 5 (11.9 percent, 23.6 percent).
• Capital-intensive manufacturing, No. 17 (8.9 percent, 10.2 percent).
• Labor-intensive manufacturing, No. 19 (7.3 percent, 6.5 percent).
• Call center, No. 12 (15.7 percent, 22.4 percent).
• Distribution center, No. 8 (19.9 percent, 24.9 percent).
Those findings differ from the last time this study was done in 2012. The rankings below are mature firm first, new firm second:
• Corporate headquarters, No. 16 (13.5 percent), No. 7 (9.9 percent).
• R&D headquarters, No. 20 (11.8 percent), No. 24 (15.4 percent).
• Retail store, No. 12 (14.1 percent) No. 15, (27.8 percent).
• Capital-intensive manufacturing, No. 15 (9.8 percent), No. 21 (8.8 percent).
• Labor-intensive manufacturing, No. 18 (9.4 percent), No. 9 (7.5 percent).
• Call center, No. 10 (16.5 percent), No. 19 (23.4 percent).
• Distribution center, No. 3 (20.6 percent), No. 12 (25.9 percent).
Dan E. Way (@danway_carolina) is an associate editor of Carolina Journal.