By Elaine Mejia
Those pesky researchers at business-friendly Ernst & Young and the Council on State Taxation have done it again. They simply refuse to develop a methodology for ranking state business tax burdens in such a way that North Carolina’s ranking will come out where the anti-tax zealots like to claim that they are.
The latest version of the “State Business Tax Burden Study†was released last month. The study tries to determine how much of the total taxes collected in each state are paid by businesses as opposed to individuals. The study found that businesses pay 36.9 percent of all state and local taxes in North Carolina. Moreover, the study found that 3.9 percent of North Carolina’s gross state product is consumed by business taxes. According to the study, the percentage of the gross state product consumed by business taxes in North Carolina is the third-lowest in the nation. According to this measure, only two states, Delaware and Oregon, have lower business taxes than North Carolina.
This study is not without its flaws. Its main objective is to show that businesses are paying too great a share of state and local taxes in all states. In reality, even when businesses write the checks to Uncle Sam those costs are often passed on to consumers in the form of higher prices and even to workers via lower wages. Nevertheless, the study clearly reinforces a basic fact about analyzing state and local taxes – focusing simply on nominal tax rates does not provide an accurate assessment of North Carolina’s tax levels relative to other states.
To illustrate this point, consider the following scenarios. In the first scenario, a taxpayer earning $100,000 per year is charged a 3 percent income tax resulting in a $3,000 tax bill. In the second scenario, a taxpayer earns the same $100,000 per year, is charged a 5 percent income tax, but only on half of their income. In this case, the taxpayer pays $2,500 in taxes. What’s important about these scenarios is that if the tax rates by themselves are compared, one would conclude that the 3 percent tax rate is lower than the 5 percent rate. In fact, the effective tax rate was actually lower under the 5 percent tax-rate scenario because the rate is applied to a smaller “base.â€
This is how business taxes often work in North Carolina. While the state’s top income tax rates and its corporate income tax rate are relatively high, the effective tax rates are lower. According to the latest data from the US Census Bureau, the only reliable source for making comparisons among states, North Carolina ranks 35th in total taxes as a share of total personal income and 33rd in taxes per capita. Those numbers hardly qualify the Old North State as “high tax.â€
So the next time you’re pondering this issue or discussing it with friends, don’t buy into the hype about North Carolina’s taxes. Lawmakers returning to Raleigh now face a weaker revenue picture than they have faced in the last few years and several important issues that need to be addressed. One thing they do not need to do is cut taxes on businesses in the name of competing with the two states that rank lower in business taxes.
Elaine Mejia is the director of the N.C. Budget and Tax Center.