The Future of North Carolina Tax Reform

January 28, 2013

Tax Foundation, Carolina Business Coalition Issue Recommendations  

Washington, D.C., January 28, 2013—Lawmakers in North Carolina have the opportunity to dramatically improve the state’s economic prospects with pro-growth tax reform, according to a new study by the Tax Foundation and the Carolina Business Coalition. By making a few structural changes, the Tar Heel State’s elected leaders could create the most competitive tax system in the country, leapfrogging others in the region and positioning the state for economic success.

The Tax Foundation study North Carolina Tax Reform Options: A Guide to Fair, Simple, Pro-Growth Reform lays out four possible scenarios for state leaders as they debate the issue during this legislative session. While the four scenarios cover a lot of different options, all are aimed at making the state a better place to live, work, and invest.

“North Carolina’s tax system currently ranks 44th out of all 50 states when it comes to business climate,” said Tax Foundation Vice President of Local and State Projects Joseph Henchman. “Both taxpayers and elected leaders know the state can do better, and we hope our report can help them make that improvement.”

Tax Reforms Options for North Carolina

  • Option A makes North Carolina the most pro-growth tax system in the country, simplifying the personal income tax at 6 percent, lowering the statewide sales tax to 3.5 percent while expanding its base to services, and repealing the corporate income and franchise taxes.
  • Option B keeps all the major taxes, but simplified and at low rates: a 5 percent income tax, 5 percent sales tax, and 5 percent corporate tax. A similar positive reform was adopted in Utah, contributing to their economic success.
  • Option C would eliminate taxes on individual and corporate income and broaden the sales tax base to services to make up the revenue. The total state sales tax rate would have to be raised to 8.75 percent to fully fund current levels of state spending, but the benefit of this option is that North Carolina would be one of the few states with no taxes on investment or job creation.
  • Option D eliminates taxes on retail sales and corporate income, paying for these reductions with a single, simple tax on individual income at a flat 10 percent rate.

“Taxes are just one of the factors that influence an individual’s decisions on where to live, work, and do business, but a tax change can have immediate impacts,” said Tax Foundation economist Scott Drenkard. “If the General Assembly wants to set North Carolina on a path to greater prosperity, a pro-growth tax reform will be the fastest way.”

The Tax Foundation study North Carolina Tax Reform Options: A Guide to Fair, Simple, Pro-Growth Reform by Joseph Henchman and Scott Drenkard is available online.

The Tax Foundation is a nonpartisan research organization that has monitored fiscal policy at the federal, state, and local levels since 1937. The Carolina Business Coalition is a business association dedicated to making North Carolina more business-friendly, and encouraging pro-business leadership in the N.C. General Assembly.

To schedule an interview, please contact Richard Morrison, the Tax Foundation’s Manager of Communications, at 202-464-5102 or


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