Yet another corporate tax cut?

by Julia Hawes, NC Policy Watch, March 10, 2014.

A proposed change in the way North Carolina taxes multistate corporations would fail to achieve its goal of boosting investment and job creation, and instead result in revenue loss that would threaten critical investments that provide the foundation of future economic growth, a new report finds.

State lawmakers are considering a change that would provide a tax cut to a handful of corporations and no guarantee of job creation, says a recent report released by the Budget & Tax Center, a project of the NC Justice Center. It would also reduce available revenue for public investments by $90 million over the next fiscal year, on top of the nearly $440 million in lost revenue resulting from the tax plan passed last year.

Read the full report at this link.

“All told, the change would likely result in further cuts to the very investments that contribute to the success and viability of corporations in our state,” said Cedric Johnson, a policy analyst with the Budget & Tax Center and author of the report.

Corporations doing business in North Carolina pay state income tax on the portion of their profits earned in the state. Currently, the state uses a formula based on a corporation’s property, payroll and sales in North Carolina, with sales factored in more heavily. State lawmakers are considering a shift to the single sales factor (SSF) formula that would only consider the sales component, meaning a multistate corporation making 10 percent of its sales to North Carolina customers would pay NC corporate income tax on 10 percent of its nationwide profit.

The report includes four reasons why North Carolina should not shift to an SSF formula:

• The single sales factor is not an effective economic development tool and is unlikely to spur job creation. Despite claims that the SSF formula will improve the state’s business climate by expanding property and payroll, other states that have adopted the formula have not seen this happen. Making a marginal change in corporate tax policy will have no significant bearing on where corporations invest or create jobs; those decisions will be determined by business fundamentals like the availability of skilled workers and the costs of energy and transportation.
• The single sales factor will not benefit North Carolina businesses with little or no out-of-state sales, putting them at a competitive disadvantage. Because SSF disregards a corporation’s in-state property holdings and payroll size in determining its taxes, it disproportionately favors corporations with a high quantity of out-of-state sales. In turn, smaller firms—which are less likely to be taxable in other states—won’t profit from this change.
• The single sales factor will further reduce revenue for public investments that promote economic growth. A shift to SSF in North Carolina would cost about $90 million in forgone revenue. The cost could be much greater in the long run because corporations that would actually pay more under SSF can restructure their operations to keep that from happening.
• If some corporations pay less, other North Carolinians will end up paying more. Since it is legally required to balance its budget, North Carolina will likely not reap any short-term economic benefits from shifting to an SSF because every dollar given away in a tax cut through this change has to be made up with either a tax increase on another business or individual or with a cut to state services–or some combination of both.

State lawmakers should reject a single sales factor formula and instead focus on creating a fairer corporate income tax by closing existing loopholes that gives preferential treatment to some businesses at the expense of others, the report says.

“North Carolina is still investing less in vital public services than it did before the recession, including K-12 education, public universities, and economic development,” Johnson writes. “If the state continues to cut support for these public investments that promote opportunity and have been shown to boost the economy over the long haul, then North Carolina’s economic future will be bleak.”

Read Johnson’s full report here.

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