(The Center Square) – Tax changes included in North Carolina’s recently adopted budget will continue to ensure the state remains among the most competitive in the country, according to the Tax Foundation.
“North Carolina has been one of the foremost leaders in state tax reform over the last decade, and this budget reinforces that position with the acceleration of income tax reductions, reducing the burden of the franchise tax, and repealing the privilege tax,” Katherine Laughead, senior policy analyst with the world’s leading nonpartisan tax policy nonprofit, told The Center Square.
“Those are all changes that will help the state’s tax code become even more competitive regionally and nationally,” she said.
The biennium budget approved by the General Assembly last week will accelerate scheduled reductions in the state’s personal income tax to 3.99% by 2026, with revenue triggers that could further cut the rate by 0.5% per year to get to 2.49% by 2029.
“Tax triggers are good policy because they ensure that when revenue comes in above target levels any extra revenue can be dedicated to reducing the income tax rate, and making the tax system more competitive,” Laughead said. “They’re already one of the most competitive states in the nation.”
She noted that many small businesses file taxes through the personal income tax system.
Reductions in spending, tax and labor reforms, reduced regulations and reworked business incentives have buoyed the Old North State’s ranking in the Tax Foundation’s Business Tax Climate Index from 46th in 2011 to 10th in 2023.
The reforms attracted massive investments from Fortune 500 companies and small businesses that have driven significant population growth, jobs and revenues for the state’s coffers. There has been a steady stream of accolades from a variety of publications including Site Selection Magazine, Forbes, Business Facilities Magazine, and Area Development Magazine, among others.
The tax reforms led by General Assembly Republicans and opposed by Democratic Gov. Roy Cooper also played a large role in CNBC, generally regarded to lean left, naming North Carolina as America’s Top State for Business two years in a row. CNBC chose to sit down with Cooper in Asheville at a tourism mecca, the Biltmore House, and he proceeded to say how dangerous lawmakers’ moves could be for the state.
Laughead said it remains unclear until the changes go into effect in January how they will impact the state’s ranking in the business climate index. She said North Carolina is one of only three states in the top 10 that does not forgo one of the main tax streams: individual income, corporate income or sales taxes. Utah and Indiana are the other two.
If revenue triggers are met and rates in other states remain consistent, North Carolina’s 2.49% rate in 2029 would be the lowest in the nation among states that levy personal income tax, she said. North Dakota is slated to go to 2.5% in 2024.
Other positive tax changes in the budget include a limit on the state’s franchise tax, which discourages investment by taxing net worth rather than income. The budget, which Cooper said he would let become law without his signature, caps the franchise tax at $150,000 starting in 2025.
A privilege tax levied on specific occupations, from accountants to pawnbrokers, was also eliminated.
Neither of those two changes, however, will impact the state’s ranking on the business climate index. The index considers only whether states have a franchise tax or not, Laughead said, while the privilege tax is not factored in.
“The repeal of the privilege tax is definitely going to help taxpayers,” she said, adding that it generates relatively little revenue for the burden it puts on taxpayers. “That will be good to get off the books, but there isn’t many other states that have that tax.
“It’s pretty unique to North Carolina … and it’s pretty antiquated.”
While repealing the privilege tax makes sense, she said a tax on rideshare services in the budget does not.
“Under an ideal sales tax structure, rideshare services – like other final personal consumption of goods and services – should be included in North Carolina’s sales tax base,” she said. “However, there is little economic justification for imposing industry-specific excise taxes, like the 1 to 1.5% Transportation Commerce Tax included in this year’s budget, on rideshare services.”