Last month, thousands of North Carolinians showed up at “Kids Over Corporations” rallies to protest the barrage of corporate tax cuts that have helped land the state in the unenviable position of ranking last in the nation for public school funding. North Carolina’s corporate tax rate has been cut seven times since 2013, and two final rounds of cuts are scheduled to eliminate the tax entirely by 2030.
By all accounts, this is not what the public wants to see from the tax code. On top of the opposition on display at recent rallies, both national and state opinion polling reveal that the constituency for corporate tax cuts is borderline microscopic. Just 7 percent of Americans think corporations are paying “too much” in tax and, here in North Carolina, just 19 percent of residents think the state’s corporate tax should be eliminated.
So far, legislative leadership has shown no sign that it’s rethinking corporate tax repeal even as it searches the couch cushions for money to fund long-overdue teacher pay raises. Might it be the case that the North Carolina General Assembly knows best, and that charging ahead with corporate tax cuts would be so good for the state’s economy that we should do it despite widespread public opposition? The answer is no. If anything, the case for repealing North Carolina’s corporate tax is even weaker than the public realizes.
Fully grasping the folly of North Carolina’s corporate tax cutting escapades requires taking a short trip into the exhilarating world of state corporate tax accounting. More specifically, it means discussing “single sales factor apportionment” which, mercifully, is less complicated than it sounds.
The corporate income tax is paid mainly by very large, multinational corporations (small businesses tend to pay their taxes through the personal income tax instead).
When a state taxes a multinational company with operations around the globe, it must figure out what part that company’s profit is fair game to tax—that is, what part gets “apportioned” to the state. In recent years most states, including North Carolina, have decided to do this by looking at where a company’s sales are occurring. If 3 percent of a company’s sales are to North Carolina customers, for example, then 3 percent of that company’s profits can be taxed by North Carolina. In other words, the state’s apportionment system is singularly focused on the location of a company’s sales, hence the name “single sales factor.”
And this, it turns out, is where the economic case for corporate tax cuts falls apart. The argument in favor of low state corporate taxes often assumes that low tax rates will entice companies to locate new jobs and production in a state—moving facilities like factories, office buildings, even headquarters in search of a lower tax bill and higher after-tax profits.
But with single sales factor being the norm these days, the notion that low state corporate taxes can spur meaningful growth is antiquated at best.
A large company choosing to move its headquarters from New York to North Carolina, or a major factory from California to North Carolina, is not rewarded with a state corporate tax cut for doing so, despite North Carolina’s much lower tax rate. Again, this is because it is the location of the company’s customers—not its workers or property—that determines what share of its profit gets taxed by California, New York, North Carolina, or some other state.
In the real world, North Carolina’s corporate tax cuts aren’t an incentive for economic growth. They’re a windfall for multinational companies that happen to sell into our state, regardless of whether they’ve made any meaningful investments here or not.
This is money that’s flowing out of our state, out of our classrooms and hospitals and fire departments, and into the pockets of multinational corporate shareholders who live all around the world. From the perspective of North Carolina taxpayers, it’s like pouring money down the drain.
