North Carolina would jump from No. 10 to No. 5 in the Tax Foundation’s state business tax climate rankings, if recently approved reforms took effect immediately.
That’s a key finding in the foundation’s latest assessment of the state’s tax policy, titled “North Carolina Reinforces Its Tax Reform Legacy.”
After two years of inaction on tax relief, tied to the budget stalemate between Democratic Gov. Roy Cooper and a Republican-led General Assembly, the newly enacted state budget includes a series of reforms.
The personal income tax rate will drop from the current rate of 5.25% to 4.99% in 2022. The rate will drop each of the next five years before settling in at 3.99% in 2027. “If no other state lowered rates below that level in the interim, this would tie North Carolina with Ohio for the fourth-lowest top (or flat) rate, trailing only North Dakota (2.9 percent), Pennsylvania (3.07 percent), and Indiana (3.23 percent) among the 41 states with income taxes,” reports the Tax Foundation’s Katherine Loughead.
In 2025 the state’s current 2.5% corporate income tax rate will drop to 2.25%. The rate will drop twice more before falling to zero in 2030. “Assuming the corporate income tax is phased down to zero as enacted, North Carolina is on track to be one of only three states — with South Dakota and Wyoming — levying neither a corporate income tax nor a statewide gross receipts tax,” Loughead notes. “Much of the burden of corporate income taxes falls on consumers in the form of higher prices, workers in the form of lower wages, and shareholders in the form of lower returns, so the phaseout of the corporate income tax will help businesses and individuals alike in North Carolina.”
The Tax Foundation also highlights an increase in the standard income tax deduction and a simplification of state franchise taxes.
“Even before this year’s reforms, North Carolina has been one of the foremost leaders in pro-growth, structurally sound, comprehensive state tax reform over the past decade, enacting comprehensive tax reform in 2013 and then building on those reforms in 2014, 2015, and 2017,” according to the Tax Foundation analysis. “This year, the state reinforced that legacy with reforms that will set the state up for another decade of leadership in the realm of pro-growth state tax policy changes.”
“While much will happen in the state tax landscape over the next decade, if North Carolina’s 2021 reforms were fully phased in now, the state would improve from 10th to 5th overall on our State Business Tax Climate Index, solidifying its position as having one of the most competitive and structurally sound tax codes in the country,” Loughead writes.
Recent reforms offer a stark contrast to North Carolina’s tax picture prior to a Republican-led tax reform package enacted in 2013.
“Before the 2013 reforms, North Carolina consistently ranked among the worst states on the Index, indicative of high tax rates on a narrow tax base, with economically inefficient incentives and carveouts that benefited declining legacy industries,” Loughead writes. “Since then, however, it has seen the most dramatic improvement of any state over the past decade, with reforms that broadened individual and corporate income tax bases and lowered rates, broadened the sales tax base to additional consumer services, and repealed the estate tax.”