By John Hood
RALEIGH — With the tumultuous election cycle behind us, lawmakers in both Washington and Raleigh will talk taxes in 2025. In the nation’s capital, the return of a Republican Congress and Trump administration will likely produce an extension of expiring tax cuts enacted back in 2017, including rate reductions and immediate expensing for the corporate-income tax.
Meanwhile, in our state capital, a GOP-led legislature will face a new Democratic governor, Josh Stein, who doesn’t share its fiscal priorities.
Let’s start there. Over the past dozen years, the General Assembly has enacted a series of tax reforms that slashed marginal rates on personal and corporate income, excluded more and more households from the income tax, and expanded the base of the state sales tax while reducing its rate — thus bestowing on North Carolina a version of the Flat Tax championed by supply-siders for half a century.
Critics seethed. They argued that the net effect of these changes was to underfund state services and tilt the tax code against lower-income people. Neither argument proved persuasive. North Carolina has pursued a gradualist approach to tax reform, phasing in key changes and requiring tax revenue to meet minimum thresholds before rate-cuts occur. State spending continues to keep pace with inflation and the state’s population.
As for the distribution of tax burdens, critics focus entirely on state and local levies while ignoring entirely the federal taxes that now fund well over a third of North Carolina’s state budget as well as significant shares of local budgets.
Every state taxpayer is also a federal taxpayer, so it makes little sense to look at tax burdens in isolation. As the left-leaning Institute on Taxation and Economic Policy confirms, America continues to have a progressive tax system. Those in the lowest-income quintile pay an average of about 17% of their incomes in federal, state, and local taxes. The next-highest quintile in income pays 22%, the middle quintile pays 26%, the next 27%, and the highest-income quintile 29%. Because of North Carolina’s balance of tax types, our shares do not deviate markedly from the national proportions.
Given current projections of state revenue for this fiscal year and the next, the General Assembly is unlikely to enact large-scale tax changes in 2025. That doesn’t mean the subject won’t come up. In a past session, lawmakers approved a gradual phase-out of North Carolina’s corporate-income tax. Some interest groups want to push the pause button on that in favor of reforming the state’s franchise tax or other levies.
I disagree. The double-taxation of corporate income — first to the firm, then to its shareholders as dividends or capital gains — has never been a defensible feature of the system. It distorts investment decisions and dampens economic growth.
Indeed, the creators of the corporate-income tax didn’t intend to layer it on top of personal-income tax. It was a replacement for it. After Congress enacted the first permanent tax on personal incomes in 1894, the U.S. Supreme Court subsequently ruled, correctly, that it violated the tax provisions of the federal constitution.
Frustrated progressives then created the corporate tax in 1909 as an alternative means of taxing the personal incomes of the wealthy shareholders who then owned nearly all corporate shares. Years later, when the 16th Amendment allowed Congress to levy a personal-income tax, it failed to abolish the corporate tax work-around. We’ve been stuck with the deleterious effects ever since.
North Carolina is, at least, doing our part. At present, we rank 12th in the nation in the competitiveness of our tax code, according to a new Tax Foundation study. What’s the most cost-effective way to vault us into the top 10? Finish phasing out the corporate tax. At that point, I’m told by Tax Foundation economists, North Carolina will, all other things held equal, rise to 5th in tax competitiveness.
As Congress and the White House seek to extend the corporate-tax reforms of 2017, we shouldn’t abandon North Carolina’s trailblazing policy. We should finish it.
John Hood is a John Locke Foundation board member. His latest books, Mountain Folk and Forest Folk, combine epic fantasy with early American history (FolkloreCycle.com).
So let’s honestly look at the 2017 tax cuts, Congress passed and Trump signed a bill that gave us a tax break. Then in 2019 Congress passed and Trump signed the Secure Act. Congress and Trump in their wisdom figured out a way to significantly raise the taxes on trillions of dollars of people’s retirement accounts. Basically putting retirement inheritance into the highest tax brackets when transferred to beneficiaries. This was not by accident they knew when they passed tax cuts the that they were going to get they money back and more by raising taxes on retirement savings. Nothing is FREE Congress and Trump giveth and then taketh more away. Giving tax breaks sounds good for re-election but does anyone remember them talking about the additional taxing of the Secure Act? NOPE!!
No federal inheritance tax
There is no federal inheritance tax in the United States. However, there is a federal estate tax that applies to estates larger than $13.61 million in 2024. This tax is assessed only on the portion of an estate that exceeds that amount
@ Retired Army MSG. Yes there is no inheritance tax, but 401k’s and IRA’s fall into a different category and more than likely taxes were never paid on them. Before the Secure Act, a person could leave their retirement to someone and that person was able two withdraw it over their life time. Since the Secure Act they MUST withdraw it over 10 years putting them in a higher tax bracket. Let say you had $600k in your 401k and left it to your 30 y/o son and his life expectancy was 60 years he would be able to withdraw $10k a year for 60 only adding $10k to his tax bracket. Under Secure he would have to withdraw the total $600k in 10 years adding $60k a year to his income. If your son’s income was $100k a year that extra $60k in income would place him in the $160k tax bracket one of the highest tax brackets, which normally is higher the a retirees tax bracket. Most retirees retirement accounts were tax deferred so Uncle Sam wants and is going to get it’s money. Under the Secure Act they have figured out how to tax more of those trillions of tax dollars that people have saved and plan to pass on to their children. I encourage you to go read the Secure Act passed in 2019 and it’s follow-up Secure Act 2.0. Spend all your retirement before you go, you can’t take it with you and because of the Secure Act passed by Congress and signed by Trump it’s going to be taxed at a higher rate when you leave it to someone.