State policymakers are considering a major reform of the tax code in North Carolina that could include a reduction in the corporate income tax rate. One rationale for doing so is the sense that the state’s competitiveness for economic development is being hampered by a corporate income tax rate that is too high relative to other states. An important question that arises is the extent to which the corporate income tax rate alone makes a big difference in business location and investment decisions? Or do businesses ultimately care about the total amount of taxes they will have to pay in a particular state? With respect to the latter, a soon to be released report suggests that the overall tax burden for businesses in North Carolina may actually be fairly low compared to other states.
Anderson Economic Group (AEG) uses a measure of tax burden that estimates the total amount of state and local taxes paid by businesses in relation to how much money is left after paying expenses. The tax burden ratio is calculated as total business taxes paid as a percentage of the total pre-tax operating margin in a state. AEG ranks all 50 states and Washington, DC based on this measure of tax burden. In the latest analysis, North Carolina has the 8th lowest tax burden in the U.S. based on 2011 data. Only Delaware, Oregon, Utah, Louisiana, Georgia, South Dakota, and Maryland have lower business tax burdens than North Carolina. The states with the highest business tax burdens are: Alaska, North Dakota, Wyoming, Vermont, West Virginia, Maine, Florida, Michigan, South Carolina, and New York.
Interestingly, Texas, currently thought to be a leader in business competitiveness, ranks 17th among the states based on this particular measure of tax burden. Perhaps a closer look at the distribution of the different types of business taxes in each state will reveal some additional insights. AEG will release its full business tax burden report soon.
It is important to note that North Carolina’s position in the AEG state tax burden rankings is in stark contrast to that of some other state business tax studies. For example, the Tax Foundation’s State Business Tax Climate Index shows North Carolina as having the 7th worst tax climate for business among the 50 states. Methodological differences likely can explain some of the divergence in results between the two studies.