As North Carolinians rang in the New Year, the state corporate tax dropped for the final step of a multiyear decrease that began in 2013 and has since been heralded by conservative tax experts as one of the nation’s greatest reduction packages in decades.
“In 2013, North Carolina aimed to create one of the most impressive programs of any state in the past 30 years, and it succeeded,” Scott Drenkard, Tax Foundation director of state projects, said in an interview.
The conservative Washington-based foundation analyzes federal, state and local taxes and helped crunch data that North Carolina Republican lawmakers used when rewriting the state’s corporate tax codes in 2013. That year, the state’s 6.9 percent corporate income tax rate ranked among the South’s highest, according to Tax Foundation analysis. The multiyear cuts, which began in 2014, continued each year until 2017, when the rate dropped to 3 percent this News Year’s Day.
Designed to make North Carolina more competitive in luring businesses from neighboring states, corporate cuts appear to be a growing trend in state tax policy.
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“A few things are driving it,” Drenkard said. “Reducing corporate tax tends to be a good bang for your buck. They don’t bring a lot of revenue into state coffers and cutting them really improves the business climate. That’s attractive to lawmakers across the political spectrum.”
Since 2008, 15 states have reduced their corporate income tax rates. This year, four states join North Carolina; Arizona going to 4.9 percent; New Mexico to 6.6; the District of Columbia to 9 and Indiana to 6, effective July 1.
The corporate tax debate played out nationally during last year’s presidential election.
The official U.S. rate is 35 percent and higher than most developed countries. A labyrinth of loopholes and deductions, however, allows corporations to ultimately pay much less. Republican President-elect Donald Trump vowed to cut it from 35 percent to 15 and simultaneously eliminate several deductions. His proposal would cut companies’ tax burden and reduce federal tax revenues over the next decade by an estimated $1.5 trillion to $1.9 trillion, according to different tax experts.
Reduced revenues have caused significant opposition. Left-leaning advocate groups say multinational corporations benefit the most and the lost revenues translate into less public spending on public education, health care and other vital investments.
Last month, Budget and Tax Center policy analyst Cedric Johnson lashed out at the Jan. 1 cut against the backdrop of Hurricane Matthew relief. In a December report Johnson argued lawmakers should help fund hurricane recovery by staying at 4 percent, not dropping to 3 percent.
According to Budget and Tax Center figures, the state has lost more than $600 million annually since the cuts began. Moving from 4 percent to 3 percent equals a loss of $900 million this year, those figures say.
“North Carolina’s corporate tax rate is already the lowest of neighboring states and among the lowest in the nation,” Johnson wrote. “Keeping the corporate tax rate at 4 percent would maintain North Carolina’s position of having the lowest corporate income tax rate amongst neighboring states while still ensuring that revenue is available to help make our state whole.”
New Democratic Gov. Roy Cooper also blasted the cuts during his campaign against former Gov. Pat McCrory. Cooper called them a tax-cut bonanza for companies that benefits the state’s wealthiest residents. Cooper has said the lost revenues have hurt education. He wants change but Republicans, who approved the corporate cuts, still run the House and Senate.