Corporate Tax Should Be Priority

By John Hood

RALEIGH — North Carolina state government is headed into the 2021-22 fiscal year with nearly $5 billion in unanticipated revenue and unencumbered savings. Even after making critical deposits into the state’s rainy-day fund, reserve for repairing and renovating state buildings, and other accounts, there’ll be enough money left on the table to start a fight.

That is, both Democratic Gov. Roy Cooper and the GOP-led General Assembly are proposing that the state spent most of the remaining surpluses on a combination of state programs, pay raises for public employees, and tax relief. They disagree, not surprisingly, on the details.

Over the past couple of years, the two sides have differed so much on fiscal priorities that North Carolina government has been operating without fully enacted budgets. The legislature kept sending Cooper new budgets. He kept vetoing them. Fortunately, government didn’t shut down. It kept operating under previously enacted totals, with a few updates contained in consensus “mini-budgets.”

I am hopeful that the 2021 session will be different, that Cooper and the General Assembly will ultimately enact a compromise. Given the unprecedented nature of the COVID-19 pandemic, the old budget allocations are clearly outdated. I don’t think mini-budgets will be a sufficient remedy. Like it or not, North Carolina voters have reinstalled a Democratic governor and a Republican legislature. It’s time to work out a deal.

A key sticking point in the negotiations, however, will be on the tax side. Cooper has proposed a $366 million package consisting of an earned income tax credit and a tax credit for child and dependent care. For their part, the Senate is reportedly considering another reduction in personal income taxes, in the form of a lower rate (4.99%, down from 5.25%) and an increase in the standard deduction. The full-year cost of the Senate’s proposal is estimated at $1.25 billion.

Speaking as just one lowly scribbler, I don’t think either tax-reduction option is sufficiently responsive to the present moment. While I’ve advocated adding or expanding child tax credits in the past, in part as a way to compensate larger families for the loss of personal exemptions, the federal stimulus bill that just passed Congress already contains gigantic — and often fully refundable — tax credits for North Carolina families.

As for reducing the personal income tax by another quarter-point, it represents welcome relief for many households and will boost economic growth a bit. But given the circumstances, I think there’s a better lever to push: the corporate income tax.

Haven’t lawmakers already slashed North Carolina’s corporate rate by a lot? Yep. Our state now has the lowest rate of any state that taxes corporate income. That’s good news, because when it comes to making states more attractive places to invest and create new jobs, the economic benefit per dollar from corporate-tax cuts are likely higher than from any other kind of tax relief.

After all, corporate taxation is inherently opaque and inefficient. It was invented as a roundabout way to tax individuals at a time when taxing personal income directly was either unconstitutional (at the federal level) or uncommon.

Corporations are merely bundles of contracts. They are tax-collecting entities, not taxpayers. Taxing corporations really means some combination of 1) reducing the investment return for shareholders (who usually face double-taxation on that stream of income), 2) reducing the wages of the corporation’s employees, and 3) raising prices on consumers. There’s some debate about the relative proportions, but a reasonable guess is that shareholders bear no more than a third of the cost. The workers’ share may be as high as 50%.

Here’s my recommendation, then. North Carolina should just phase out its corporate-income tax entirely over the next two years. The fiscal impact (around $900 million) would be less than the proposed cuts in personal income taxes and yet confer broad benefits on employees and consumers.

Besides, Congress and the Biden administration seems determined to hike the federal corporate tax. Let’s offset some of the inevitable economic damage in our own state.

John Hood is a Carolina Journal columnist and author of the forthcoming novel Mountain Folk, a historical fantasy set during the American Revolution (MountainFolkBook.com).