As 2025 comes to a close, North Carolina stands in an enviable position. After more than a decade of disciplined tax reform, the Tar Heel State has emerged as one of America’s most economically competitive states. CNBC’s America’s Top States for Business rankings once again place North Carolina among the nation’s leaders, confirming what employers and investors already know: North Carolina is a premier place to invest, expand, and create jobs.
That reputation is reinforced by the Tax Foundation’s 2026 State Tax Competitiveness Index, which ranks North Carolina 13th overall — up from 44th as recently as 2013 — ahead of most states that levy all the major taxes and near the top nationally on corporate taxation. This strong showing is no accident. It reflects a flat 4.25% individual income tax, the lowest corporate income tax rate among states that still levy one, at 2.25%, and a sustained commitment to broad tax bases and low rates rather than politically favored credits.
Yet even the Tax Foundation is clear: North Carolina’s biggest remaining obstacle to greater competitiveness is its franchise tax.
WHAT MAKES THE FRANCHISE TAX DIFFERENT — AND HARMFUL
Unlike income-based taxes, the franchise tax is levied on a business’s net worth — its accumulated capital — regardless of whether the business is profitable. Companies pay it year after year simply for owning assets, even in downturns or startup phases. In effect, the tax penalizes investment itself, taxing firms not on what they earn but on what they have built.
The Tax Foundation’s North Carolina profile does not mince words. It calls the franchise tax “unusually aggressive,” noting that it taxes businesses “on their worth rather than their profits,” harming investment and violating basic principles of tax fairness and ability to pay. In a state otherwise defined by pro-growth tax policy, the franchise tax stands out as an anachronism.
REAL COSTS FOR REAL BUSINESSES
This problem is not theoretical. A 2024 John Locke Foundation report shows that the franchise tax creates especially high compliance costs due to its complexity and traps small businesses and independent contractors in mandatory minimum payments. The burden falls especially hard on mom-and-pop businesses, such as a local plumbing company with fewer than 20 employees that owns a small fleet of work vans. Even in a slow year, that firm owes the franchise tax simply for having invested in the vehicles and equipment it needs to operate — penalizing small businesses not for profits, but for preparedness. The same analysis shows that the tax exposes companies to punitive audits over technical errors rather than real tax avoidance, and that businesses can owe the tax even if they lose money — or even if they have no physical presence in North Carolina, so long as they sell goods here.
And for all that damage, the franchise tax contributes little to state finances. In recent years it has accounted for just over 2% of General Fund revenue, a share that is shrinking further due to recently enacted caps. That is a steep economic price to pay for such a modest and declining return.
That reality leads to the most common objection to repeal — and the least persuasive.
THE REVENUE OBJECTION — AND WHY IT FALLS SHORT
Critics will argue that repeal is impractical because the franchise tax still generates revenue. But that objection misunderstands both scale and trade-offs. The amount involved is small enough to absorb through normal economic growth, ongoing budget surpluses, or modest base broadening elsewhere. More importantly, repealing the franchise tax would remove a direct penalty on capital investment, encouraging business expansion that broadens the income and sales tax bases over time. In other words, repeal is not a gamble on growth — it is an exchange of a narrow, distortionary tax for a broader, more sustainable revenue stream.
Other states have recognized this reality. Oklahoma repealed its capital stock tax. Mississippi is phasing its out. Connecticut is completing its repeal. Louisiana has already enacted repeal as part of a broader competitiveness package — and the Tax Foundation expects that move alone to produce meaningful improvements in Louisiana’s rankings and investment climate. Meanwhile, North Carolina risks being left behind, clinging to a tax most states have already abandoned.
What makes this moment especially important is that North Carolina has already done the hard work. The state has resisted the temptation to rely on narrow tax credits and instead built a system based on low rates and neutrality. That approach is precisely why North Carolina ranks so highly among states that levy all major taxes. Eliminating the franchise tax would not be a radical departure — it would be the logical completion of a long-running reform agenda.
A clear next step for 2026
If lawmakers want a single, concrete goal for strengthening North Carolina’s economy in 2026, this is it. Repeal the franchise tax. Remove the last major tax penalty on capital formation. Signal to entrepreneurs, manufacturers, and employers that North Carolina will not tax them for growing, investing, or weathering hard times.
North Carolina has become a national model by refusing to settle for “good enough.” Ending the franchise tax would ensure it remains one.
