Thousands of educators marched in Raleigh earlier this month, calling for greater investment in public schools and an end to the state’s plan to phase out the corporate income tax by 2030.
The rate has been a debated topic in the legislature, too. Though under the current framework budget deal, the plan hasn’t changed.
For this edition of Carolina Curious, WFDD’s Amy Diaz spoke with North Carolina State University Accounting Professor Nathan Goldman about the rationale behind the cuts and what drives businesses to certain states.
Revenue neutrality
For the last ten years, North Carolina has had a relatively low corporate income tax rate.
It was 4% in 2016, and is 2% now — the lowest in the country among all states that have a corporate income tax. And in the next few years, it will join the six that don’t have one at all.
The legislature enacted the plan to phase it out in 2021. Nathan Goldman, whose teaching and research focus on corporate taxation, says the idea was to lure in businesses. Then, their employees would end up paying a variety of taxes that fuel the state’s economy.
“At the time, there was a huge budget surplus, things were looking really good ... when Roy Cooper was governor," Goldman said. "And you know, since then, as the corporate tax rate has gone down, as the individual tax rates have gone down, some of those budgetary things haven't looked quite as promising, which has led to kind of the questions that people are having now of, should we still be going to a 0% corporate income tax?”
Goldman teaches a concept in his class called “revenue neutrality,” where the goal is to collect as much in taxes as you plan to spend. When there’s a surplus, states can decide to return it to the taxpayers somehow.
Georgia mailed checks to residents. North Carolina decided to lower rates over time. Goldman says the other option is to make a greater investment in services.
“So it's not necessarily a bad thing to not spend it, but then we also have to look at, what are our expenses that we have? We have very below average teacher pay in the state of North Carolina. What a great expense that could be," Goldman said. "We could pay our K-12 teachers more. We could pay our state employees more, things like that.”
But if a state is not collecting enough taxes to cover expenses, there’s a risk of running a deficit, which states are not allowed to do. The only options then are to cut costs or increase revenues — aka collect more taxes.
Gov. Josh Stein recommended freezing the corporate income tax rate where it is to avoid a drop in revenue. Republicans in the legislature, on the other hand, have largely been in favor of staying the course.
Attracting businesses
But does it make a big difference to a corporation to pay a 2% income tax rate versus none at all? Goldman says it depends.
“For some corporations, absolutely, that was all they needed to be to be lured here," Goldman said. "For others, that was a rounding error on their balance sheet. So it's kind of hard to say.”
He says taxes are just one factor corporations are taking into consideration as they look for places to set up shop. And North Carolina is attracting businesses for lots of reasons.
“It has great schools, has a great community. It's close to the coast, close to the mountains. There's all these great things that are inherent about North Carolina," Goldman said. "So then you know, you start to question how much of it is being driven by the going from a two to 0% corporate income tax rate, or how much of it is being driven by these other investments the state’s made.”
Goldman says tax policy debates, like we’re seeing in North Carolina, are happening all across the country right now as states take divergent approaches.
New York, Washington and California, for example, are exploring higher taxes, while states like Tennessee and North Carolina are lowering them. He says there’s not a one-size-fits-all solution, but striking a balance is key.