An increase in state revenue collections is likely to trigger new cuts in the state’s corporate income tax rate, beginning with the 2016 calendar year, officials said Wednesday.
The latest forecast shows state revenue growing to levels that would beat targets written into state law – one feature of the overhauled tax code that Republican legislators approved in 2013.
“If those triggers do in fact meet the goals that we set forth, then we will follow through on that promise,” Gov. Pat McCrory said Wednesday.
Republicans have said cutting the corporate income tax rate has been – and will remain – an important tool for attracting businesses and improving the state’s employment picture.
The 2013 overhaul trimmed the corporate income tax rate from 6.9 percent to 6 percent for 2014.
It was reduced again to 5 percent for 2015.
If the state generates $20.2 billion in general fund tax revenue by the end of the current fiscal year, which is June 30, then the legislation allows for a cut in the corporate tax rate to 4 percent beginning on Jan. 1, 2016.
The latest forecast, released Wednesday, shows the state bringing in much more – $21.4 billion for the budget year that ends June 30. The forecast is not expected to change significantly.
State law calls for an additional cut in the corporate rate – to 3 percent – at the start of 2017 if revenue is at least $20.98 billion for the budget year that ends in June 2016.
The latest forecast for that budget year projects $22 billion in receipts.
The new report from the legislature’s Fiscal Research Division, in consensus with the state budget office, says a drop in the corporate tax rate to 4 percent would amount to $109 million less to the state.
For context, that’s the equivalent of what McCrory is proposing to allocate in the coming fiscal year for school districts to spend on school textbooks, instructional supplies and other such materials. And the state courts system, for example, has been seeking $16 million more to address operational costs.
Creating jobs or bad policy?
A year-by-year fiscal analysis shows a drop in the corporate tax rate to 3 percent would mean a revenue reduction to the state of about $349 million in fiscal year 2016-17.
McCrory said the additional corporate breaks would “help the job creators in North Carolina so the economy continues to grow.”
Critics say it’s bad policy.
In a news conference Wednesday, Democratic leaders in the state House and Senate said corporations are paying less in taxes while middle class and smaller businesses are dealing with the loss of certain tax credits.
“It doesn’t take a lot of stretch to understand that when you eliminate tax deductions for small businesses … that you’re going to collect more money,” said Senate Minority Leader Dan Blue, a Raleigh Democrat.
The left-leaning N.C. Budget and Tax Center is also critical of the tax reductions. It says trimming rates for “a select few” businesses is misguided.
“We know that profitable corporations are doing very well,” said Alexandra Sirota, the group’s director. “We know that taxes represent a very small share of profitable corporations’ cost structure.”
She said they’re also unlikely to reinvest their tax-cut savings into North Carolina for jobs and capital expenditures and that the state’s coffers would be healthier without the cuts.
Proponents tie the corporate income tax cuts directly to growth.
“These revenue targets were established to test the success of tax reform in growing North Carolina’s economy, and the new projections clearly show that we are on the right track,” said Gary Salamido, vice president of government affairs for the North Carolina Chamber.
In a report, a right-leaning group called Economic Growth NC, which formed early this year to highlight conservative policy, said: “Critics can’t admit that after cutting taxes, NC’s job growth percentage is now besting the US average.”
The state’s current corporate income tax rate is the same as South Carolina’s 5 percent and is lower than the 6.5 percent rate in Tennessee and the 6 percent rate in Georgia and Virginia.
The revenue stream from the corporate income tax brought in $1.35 billion for North Carolina in fiscal year 2013-14, according to the N.C. Department of Revenue.
It amounts to about 7 percent of the state’s general fund budget.
Benjamin Brown writes for the NCInsider.com, a government news service owned by The News & Observer. www.ncinsider.com