Tax Analysts Blog

North Carolina Tax Changes -- Sort of Good, Kind of Bad

Posted on Oct 7, 2015

Recently, North Carolina enacted significant tax changes. Some of them were very good. A few were awful. On the good side, the state lowered the personal income tax rate from 5.75 percent to 5.49 percent. Lowering rates is usually good for the economy and for the people paying taxes. I believe that people know how to spend their money in ways that improve the economy much better than the government does. The state also expanded the no-tax exemption to $15,500, providing more relief for low-income taxpayers. In general that is a good thing. The poorest among us are already saddled with paying sales and excise taxes. Providing income tax relief is the right thing to do.

But the state changed its corporate income tax rules in a way that makes the tax weaker. I don’t like the corporate income tax because I don’t believe it works well even in the best of circumstances. North Carolina made it worse. It adopted something called single-sales-factor apportionment. This taxes corporations only on their sales in the state. It does not tax corporations when they build factories or hire people. This may be a good thing from an economic development or a political perspective, but it is bad tax policy. North Carolina would have been better off repealing the tax. This move only allows for more extensive tax planning to avoid taxes.

North Carolina also expanded the sales tax base to include some services. That is generally a great thing. But the new laws will impose the sales tax on repair, installation, and warranty services when provided by a business that is already subject to sales tax collection. So that does little to fundamentally change the tax system. On the very negative front, legislators were very proud of extending preservation tax credits. I am not sure why. Nothing says boondoggle like giving rich folks tax dollars to fancy up old buildings. On the super-negative front, the legislature is giving Hollywood moguls $30 million in each of the next two years to make films in North Carolina. I guess they haven’t read any of the studies showing that film credits don't work. But why let facts stand in the way of policymaking?

A version of this post first appeared in State Tax Notes magazine.

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