After North Carolina’s general assembly adjourned without renewing several taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. credits or offering funding for several economic development programs, municipalities and economic development offices have begun calling for a special session. The main programs in question are the Job Development Investment Grant (JDIG), which allows qualifying businesses to be rebated a share of withholdingWithholding is the income an employer takes out of an employee’s paycheck and remits to the federal, state, and/or local government. It is calculated based on the amount of income earned, the taxpayer’s filing status, the number of allowances claimed, and any additional amount of the employee requests. taxes paid by new employees, the film tax creditA tax credit is a provision that reduces a taxpayer’s final tax bill, dollar-for-dollar. A tax credit differs from deductions and exemptions, which reduce taxable income, rather than the taxpayer’s tax bill directly. , the historic preservation tax credit, and the renewable energy tax credit. All of these programs have been reduced or allowed to expire as part of North Carolina’s landmark base-broadening tax reforms in the last few years.
Retiring such narrow, distortionary incentives is a vital part of sound tax reform. Lower rates cannot be sustainably paired with bigger incentives and deductions (i.e. a narrower base). Simplifying the tax code by removing incentives for historic preservation, renewable energy, and film tax credits, in combination with reduced headline rates, is likely to boost economic efficiency. While some interest groups and politically favored sectors may lose out in the short run, ultimately, lower, simpler taxes are more supportive of economic growth.
Economic development offices understandably have concerns with reduced tax credits, because these tools give them flexibility to compete for big, flagship companies. But while that sounds like a feature of tax incentives, it’s actually a fault. The big headline companies do get special tax preferences, while smaller companies with long histories in North Carolina don’t, and foot the full freight of the tax. Then, the next time that big new company is looking to expand operations, they’ll come calling for an even bigger incentive to stay. On the other hand, states could save money on economic development expenditures by simply offering lower taxes to all companies, and removing the need (and cost) to negotiate special deals.
That’s the whole idea behind lowering rates and broadening bases: eliminate special provisions to finance lower taxes for everyone. North Carolina succeeded in lowering the rates, but is starting to face pushback now on broadening the base. The state has taken a big step towards smarter tax policy: now it remains to be seen whether policymakers will remain committed to last year’s groundbreaking reforms, or backtrack away from the principles that underlay those reforms. Of course, if North Carolina’s tax changes this year are any indication, then it seems likely that simple, sound, pro-growth tax policy will win out.
Read our North Carolina tax reform guide here.
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