North Carolina Over-Taxed

Special Report - February 3, 2012

The Tax Foundation’s annual 2012 State Business Tax Climate Index found that North Carolina suffers from the seventh worst tax system in the country. The report, which was released in January, compares states’ tax systems “as of July 1, 2011, the first day of the standard 2012 state fiscal year.” North Carolina ranked among the 10 worst states, coming in at 44th, the lowest ranking in the Southeast. Only Minnesota, Rhode Island, Vermont, California, New York, and New Jersey ranked worse than North Carolina. The five states with the best tax systems, according to the report,  are Wyoming, South Dakota, Nevada, Alaska, and Florida.

The success of the top 10 states is attributed to states raising “sufficient revenue without one of the major taxes,” such as the corporate tax, the individual income tax, or the sales tax. The top three states (Wyoming, South Dakota, and Nevada) do not have a corporate or individual income tax. Fourth place Alaska does not have an “individual income or state-level sales tax.” Fifth place “Florida has no individual income tax,” and New Hampshire and Montana at sixth and eighth place do not have a sales tax.

According to the report, the bottom 10 states suffer from “complex, non-neutral taxes with comparatively high rates.” North Carolina’s individual income tax and sales tax rank abysmally at 43rd and 47th, respectively. North Carolina’s individual income tax ranking is negatively impacted by the marriage penalty suffered by married couples who file jointly in the state. Still, North Carolina’s sales tax dropping from 5.75 percent in 2010 to 4.75 percent in 2011 helped the state’s sales tax ranking to improve from its previous 49th place. The State’s property tax ranks 35th in the nation, with a corporate tax ranking of 29th (down from 25th in 2011). Positively, North Carolina’s unemployment insurance tax ranks 7th in the nation. Overall, North Carolina’s 44th place finish is better than its 46th place finish in 2011, thanks in part to the sales tax decrease, as well as the expiration of a temporary three percent income surtax.

The Index used North Carolina as an example of a state that unwisely opted “to lure business with lucrative tax incentives and subsidies instead of broad-based tax reform.” Specifically, the report singled out North Carolina’s “$420 million worth of incentives to lure Dell to the state,” many of which were state and local tax credits. After only four years, in 2011, Dell announced that it was closing the plant it had opened. According to the report, “if a state needs to offer such packages, it is most likely covering for a woeful business tax climate. A far more effective approach is to systematically improve the business tax climate for the long term so as to improve the state’s competitiveness.” The report urges lawmakers to remember that “Taxes matter to business” and that “States do not enact tax changes (increases or cuts) in a vacuum.”

“The evidence shows that states with the best tax systems will be the most competitive in attracting new businesses and most effective at generating economic and employment growth,” wrote the Index’s author, Mark Robyn. He went on to cite data from the U.S. Department of Labor showing “that most mass job relocations are from one U.S. state to another.” Because of this, he urges state lawmakers to be “aware of how their states’ business climates match up to their immediate neighbors and to other states within their regions.” The Index points out, “Changes to the tax code can quickly improve a state’s business climate,” unlike other changes that may take decades to implement, such as changes to health care, transportation, or education systems.

Related Resources:
Benefits Abound from Lower Taxes - May 17, 2011
Squeezing Families: How Expanding Government Undermines the Family - FNC - Fall 2010
NC Leads in Tax Increases - January 19, 2010
North Carolina’s Entrepreneurship Ranking - December 31, 2009
Report Says NC Tax Eighth Highest - October 27, 2009
Tax Policy, Marriage, and the Family - FNC - Fall 2006

Copyright © 2012. North Carolina Family Policy Council. All rights reserved.

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