Agenda 2012: State Tax Reform -- Corporate Income Tax | Eastern North Carolina Now

   Publisher's note: Agenda 2012 is the John Locke Foundation's charge to make known their wise political agenda to voters, and most especially candidates, with our sixth installment being the "State Tax Reform -- Corporate Income Tax," found in the Budget, Taxation, and the Economy section, and written by Dr. Roy Cordato, Vice President for Research and Resident Scholar at the John Locke Foundation. The first installment was the "Introduction" published here.

    North Carolina's corporate income tax violates basic principles of sound economic policy and open government. It not only imposes a second and even a third layer of taxation on many people's incomes, but it is hidden, dishonest, and inconsistent with informed decision making in a free and democratic society. Ultimately, the tax serves as a tool of business subsidization and central planning. Most of the major economic incentive schemes launched by North Carolina state government have centered around granting exemptions from the corporate income tax in the form of tax credits. Politicians have come to see the tax as a way to gain power over market outcomes through the process of granting exemptions.

Key Facts

    •    North Carolina's 6.9 percent corporate income tax rate is higher than that of all our neighboring states and the second-highest corporate tax rate in the South.

   •    North Carolina has had a corporate income tax since 1921. Between 1921 and 1991 the rate increased from 3 percent to 7.75 percent. It was then lowered every year between 1997 and 2000 when it fell to its current rate of 6.9 percent.

    •    The corporate income tax is based on the myth that corporations actually pay taxes. In fact, corporations not only do not pay taxes; they cannot pay taxes.

    •    All taxes must ultimately come from some real person's pocket. These real people are shareholders who experience lower dividends and capital gains, customers who pay higher prices, and workers whose wages are lower.

    •    In order to make intelligent voting decisions, citizens need to be aware of how much their government is costing them. The corporate income tax is deceptive because it is invisible to those who are paying it and it is dishonest because it gives the false impression that corporations are paying the tax.

    •    The corporate income tax imposes a second and even a third layer of taxation on people's incomes. For workers and customers, it represents a second layer and for shareholders, whose investment income is already double taxed under the state's income tax, it is a third layer of tax.

    •    Partial or even full exemptions from the corporate income tax are granted for everything from building recycling facilities and installing solar power plants to using the state's ports (see a more complete list below).

    •    Politicians have come to see the corporate income tax as a way to gain power over market outcomes through the process of granting special exemptions based on industry or location. These exemptions are a form of crony capitalism.

    •    The corporate income tax is best viewed as a type of "negative slush fund." Instead of using a stash of already collected tax money to directly subsidize favored businesses and political allies, politicians allow favored business interests to keep more of their own money than the tax would otherwise indicate.

Recommendations

    1.    Repeal the corporate income tax.




    Analyst: Dr. Roy Cordato

     Vice President for Research and Resident Scholar
     (919) 828-3876 • rcordato@johnlocke.org