Guest Opinion: State tax reforms foster manufacturing

Published 8:43 am Sunday, September 24, 2023

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By John Hood

Site Selection just released its latest “Best States for Manufacturing” report. North Carolina ranked second in the nation in 2023, behind only South Carolina.

The study relies on three categories of data: 1) workforce and market alignment, 2) operating costs, and 3) geographic positioning. North Carolina compares favorably with other states in all three, but our strongest ranking is for operating costs — including costs imposed by state and local taxes.

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To say tax policy influences the decisions of manufacturers and other employers is not to say it’s the only lever of importance that state and local leaders can operate. The regulatory environment matters. The quality of public services matters. As jurisdictions compete vigorously for people and investment, however, North Carolina wouldn’t be in the running if our leaders hadn’t reformed and reduced our tax code.

Over the past decade, for example, the General Assembly has slashed the state tax on corporate income to 2.5%, down from 6.9%. It’s scheduled to phase out entirely by 2030. If the goal is maximizing economic growth, this is probably the most cost-effective tax reform any state could adopt. Keep in mind that taxing corporate income is redundant — it subtracts from the incomes of shareholders, workers, vendors and consumers who are already being taxed.

Lawmakers also passed dramatic reforms of the individual income tax, adopting a flat marginal rate and eliminating personal exemptions in favor of standard deductions and per-child tax credits. Once north of 8% for some households, that tax rate is now 4.75% and will drop further in future years. Legislators also broadened the sales-tax base while reducing its rate and eliminated a range of inefficient or foolish tax breaks.

These changes didn’t just make North Carolina a better place for big companies to set up shop, or for the employees of such companies to live and rear their children. The reforms also made our state a more attractive place to found and operate new business enterprises, small or large.

The online business-information company SimplifyLLC has just published a new ranking of its own, the “Best and Worst States for Small Business Taxes.” North Carolina placed sixth in this study, which included data on income, sales, property, and payroll taxes.

The five states ranking above us were, in order, Nevada, South Dakota, Washington, Wyoming, and Texas. Because none levies a personal income tax, North Carolina was the highest-ranking state among those that levy such a tax. All the worst-ranking states tax income in multiple and punitive ways: New York, Massachusetts, California, Minnesota and New Jersey.

I don’t happen to believe, by the way, that North Carolina can or should abolish its personal income tax, at least not anytime soon. It still generates about half of the state’s general revenues. And North Carolina primarily funds its schools at the state level, not the local level, meaning that any serious plan to replace the lost revenue would either have to expand our sales tax dramatically or compel localities to increase their property taxes dramatically. Neither prospect strikes me as prudent or politically feasible.

According to the SimplifyLLC study, North Carolina taxes more lightly than most in every category: seventh lowest in corporate income, 19th in personal income, 11th in property, and 16th in sales and payroll (for unemployment insurance). As we abolish the corporate tax and continue to reform our other tax codes, North Carolina will enter the top rank of states without having to create new taxpaying entities or rethink our entire education-finance system.

Although manufacturing doesn’t make up as large a share of our economy — and not nearly as large as share of our labor market — as it did half a century ago, North Carolina remains home to some of the world’s most productive manufacturing enterprises. We can keep it that way by improving our educational system and transportation networks, junking cost-inefficient regulations, and staying on the course on the most thoughtful, innovative and effective tax reforms any state has ever enacted.

John Hood is a John Locke Foundation board member.