A few weeks ago, I gave you an inside look at the first chapter of North Carolina Illustrated: A Visual Guide to Tax Reform, an interactive report developed by the North Carolina Chamber Foundation in coordination with the nonpartisan Tax Foundation. The first chapter looked back to a time before the major tax overhauls that the Chamber and our members helped secure beginning in 2013, when our state’s high tax burden and poorly structured tax code stuck us with the 44th overall ranking in the Tax Foundation’s State Business Tax Climate Index. This week, I wanted to give you a glimpse at part two of the three-part report, which aims to provide you with a clearer understanding of exactly what tax reform accomplished in North Carolina – and what those achievements mean for you.
Let’s start with the obvious: North Carolina’s corporate income tax rate. Prior to the 2013 reforms, our state’s 6.9 percent tax rate on corporate income relegated North Carolina to the bottom-half (30th worst) of the Tax Foundation’s corporate rate index. After the first round of tax reforms, however, the rate dropped to 6 percent in 2014, and then to 5 percent in 2015. Our leaders then upped our competitive game even higher. Additional reforms secured in 2015 set the stage for further reductions, with the rate dropping to 4 percent at the beginning of 2016, and another drop to 3 percent coming into effect once projected state revenue targets are met (likely later this year). When that happens, we’ll have the lowest corporate rate among states levying one as our corporate tax climate climbs to the 4th best in the nation.
Individual income taxes also matter to businesses, particularly “pass-through” entities (62 percent of North Carolina’s payroll employers) where business income flows through to the owners’ individual tax returns. This is especially important for small businesses, as sole proprietorships, partnerships and S-corporations account for the majority of the state’s pass-through entities. Before tax reform, the Tax Foundation ranked North Carolina’s high, multi-tiered individual income tax rate as more competitive than only eight other states. Tax reform simplified the process, creating a flat rate for all individual filers in North Carolina. When that rate is fully phased in next year, at 5.499 percent, our state is expected to be ranked 14th by the Tax Foundation on its individual income tax component.
These changes are already working to save money on your bottom line, and in the coming years, they’re expected to keep more than $2.5 billion in the private sector that would otherwise have gone elsewhere. In addition, the repeal of North Carolina’s estate tax – a smart move given its high compliance costs in contrast to its relatively low share of total state tax revenue – and a limited expansion of the sales tax base to include certain previously untaxed services, introduced additional layers of modernization to the tax code.
Put simply, tax reform lowered rates, broadened bases, and made North Carolina’s tax code more neutral and simple – and more competitive in the global race for jobs. Once reforms are fully phased in, North Carolina’s overall tax code is expected to rise to the 13th most competitive nationally in the Tax Foundation’s rankings. That’s good news for our state’s businesses and individuals alike; but at the North Carolina Chamber we will stay focused to keep our state competitive and continually moving up in the rankings. Next time, we’ll take a look at the final chapter of North Carolina Illustrated, which details the steps our state’s leaders can take to make our tax code even better in the coming years.
Gary J. Salamido
Vice President, Government Affairs
North Carolina Chamber