RALEIGH — Gov. Bev Perdue, who will release her budget today, has reignited a long-running debate in North Carolina business and political circles - whether the state's corporate income tax is too high.
On one side are those who think the state can best promote economic development and encourage business activity by cutting taxes. But others say North Carolina needs to keep its corporate tax rate as it is, so the state can continue to invest more money than most Southern states in its universities and community colleges.
In her State of the State address Monday, Perdue surprised many when she proposed cutting the state's corporate income tax from 6.9 percent to 4.9 percent.
North Carolina's corporate rate now ranks 26th in the nation but the highest in the Southeast, according to the nonpartisan Tax Foundation, a conservative-leaning organization in Washington. But if Perdue's proposal were enacted by the legislature, North Carolina would have the third-lowest corporate tax rate in the nation - behind only Colorado and oil-rich Texas, which has no corporate or personal income tax.
"To cut to 4.9 percent to get us to the lowest in the Southeast, I believe, would be a great generator of inquiries for corporate expansion and corporate relocations," said David Hoyle, a former Democratic state senator who is now revenue secretary and a key adviser to Perdue.
'No evidence' of jobs
But Alexandra Sirota, director of the Budget and Tax Center, a nonprofit advocacy group working for low- and moderate-income North Carolinians, is skeptical that the tax cut would accomplish much.
"There is no evidence that will create the jobs we need," she said.
Business and Republican leaders have long called for reducing the corporate income tax, saying it is an impediment to economic development. During the last gubernatorial campaign, at least one Republican, Bill Graham, called for reducing the corporate tax to 5 percent. Senate Democrats considered abolishing the corporate income tax in the late 1990s, Hoyle said.
The corporate income tax generates about $1 billion a year for the state - or about 5 percent of the state's General Fund operating budget.
Hoyle said many corporations do not actually pay the 6.9 percent rate, because they can take advantage of a multitude of tax breaks and loopholes to effectively lower their rates. But corporations classified for tax purposes as "C corporations" would benefit the most from a reduction in the corporate tax rate, Hoyle added.
"Who it would help the most would be these C corporations - some are fairly good-sized companies - people who have their total income contained within the state of North Carolina," he said. "They have no way to get the loopholes and no way to get the special credits."
But cutting taxes is a public policy tradeoff, in which there will be less money to spend on the University of North Carolina, on the state's community college system and on other public services. This comes when the state is facing major budget cuts as it deals with a projected $2.4 billion budget shortfall.
The state Department of Revenue said it could not project how much revenue would be lost if the corporate income tax was cut. The Budget and Tax Center estimates that the cuts would cost $300 million in 2011-12 and $327 million in 2012-13.
"Businesses are often looking at more than just the corporate tax rate," Sirota said. "They are looking at infrastructure, an educated work force and other business costs associated with doing business."
Sirota cited a report by the Center on Budget and Policy Priorities that found that "cutting total state and local taxes paid by businesses in a state by 10 percent - a very large reduction - is likely to boost economic output and jobs by only 2 percent to 3 percent."
'On solid ground'
Michael Walden, an economist at N.C. State University, said the preponderance of research suggests that a high corporate income tax can negatively affect economic growth.
"I think the governor is on solid ground in that perhaps one thing that can be done in the tax schedule to attract more growth would be to lower the corporate income tax," Walden said.
But he added that most researchers would say that lowering the corporate tax increase is "not the magic slipper" that will cause a flood of business activity. Plus, there are many factors that go into the business climate, including the fact that North Carolina has the nation's lowest rate of unionization.
"The tax system is just one piece," Walden said. "Many economists would say it is a minor piece."
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