Corporate Tax

Company earnings tax must be a precedence to columnists

The North Carolina state government faces fiscal 2021/22 with nearly $ 5 billion in unexpected revenue and unencumbered savings. Even after critical deposits are made into the state’s Rainy Day Fund, the reserve for repairs and renovations of state buildings, and other accounts, enough money remains on the table to start a fight.

That said, both Democratic Governor Roy Cooper and the GOP-led General Assembly are proposing that the state spend most of the remaining surpluses on a combination of state programs, pay rises for public employees, and tax breaks. Unsurprisingly, they agree on the details.

A key sticking point will be on the tax side. Cooper has proposed a $ 366 million package consisting of an Earned Income Tax Credit and a Child and Dependent Tax Credit. For its part, the Senate is reportedly considering a further cut in income taxes in the form of a lower rate (4.99% vs 5.25%) and an increase in the standard deduction. The total annual cost of the Senate proposal is estimated at $ 1.25 billion.

I am only speaking as a minor clerk, and I don’t think either of the two tax cut options is sufficiently responsive to the present moment. While I’ve advocated adding or expanding child tax credits in the past, in part to compensate larger families for the loss of personal exemptions, the federal law just passed by Congress already includes gigantic tax credits for families in North Carolina.

The income tax cut is a welcome relief for many households and will stimulate economic growth. But given the circumstances, I think there is a better lever: corporate tax.

Haven’t legislators already cut North Carolina’s corporate rate? Yes. Our state now has the lowest rate of any state taxing corporate income. This is good news because when it comes to making states more attractive to invest and create jobs, the economic benefit of corporate tax cuts per dollar is likely greater than any other type of tax break.

Corporate taxation is inherently opaque and inefficient. It was invented as a detour to tax individuals at a time when direct taxation on personal income was either unconstitutional or unusual.

Companies are just bundles of contracts. You are a tax collector, not a taxpayer. Indeed, corporate taxation means a combination of 1) reducing the return on investment for shareholders (who typically face double taxation of these income streams), 2) lowering the wages of company employees, and 3) increasing consumer prices. There is some debate about the relative proportions, but a reasonable guess is that shareholders will pay no more than a third of the cost. The employee share can be up to 50%.

So here is my recommendation. North Carolina should phase out its corporate income tax completely over the next two years. The tax impact (around $ 900 million) would be less than the proposed income tax cuts, yet it would bring far-reaching benefits to employees and consumers.

Also, Congress and the Biden administration appear determined to raise federal corporate income taxes. Let’s redress some of the inevitable economic damage in our own state.

John Hood is a columnist for the Carolina Journal.

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