North Carolina Set to Become the Newest 0% Corporate Income Tax Rate State

By Nathan Goldman

On November 18, 2021, Governor Roy Cooper signed the first state budget in several years into law. This $25.9 billion budget included numerous provisions, including pay raises for teachers and state employees, funding for broadband expansion, increases to individual income tax deductions and increases to a “rainy day” fund, among other important changes. Poole College of Management assistant professor of accounting, Nathan Goldman, explains the impact for North Carolina corporations.

One key provision in the budget was the gradual decline in state corporate income tax rates. Prior to the passage of the budget, North Carolina’s corporate income tax rate was 2.5%, which was already the lowest in the country among states that collect corporate income taxes. However, this tax rate will decline gradually using the following schedule:

Several states also levy no corporate income taxes – Nevada, Ohio, South Dakota, Texas, Washington and Wyoming. However, only South Dakota and Wyoming do not levy a gross receipts tax. Thus, North Carolina will emerge from this change as being among the most competitive states for corporations in the United States when it comes to their corporate tax collections. In fact, the Tax Foundation estimates that North Carolina will eventually move to being the first best state when it comes to corporate tax collections and fifth best state overall in the Tax Foundation’s State Business Tax Climate Index rankings – a compilation of corporate, individual, sales property and unemployment insurance taxes.

The decrease in income taxes has obvious benefits, like making North Carolina a more competitive business environment, and costs, such as a decreased amount in tax collections to be repurposed throughout North Carolina. However, questions arise as to how these benefits and costs trade off. For example, prior to numerous state tax changes made in the early 2010s, North Carolina ranked 44^th in the State Business Tax Climate Index. During this time, North Carolina has seen GDP grow 17.7% from 2013 to 2019, which is more than 2% greater than non-North Carolina U.S. states growth during this same time period. Thus, many can point to the state’s improving business environment as having a positive influence on state growth.

However, even as recently as 2019, Forbes ranked North Carolina as the best state for business. Additionally, skeptics can look back no further than 2021 when North Carolina landed Apple Inc.’s newest headquarters and North Carolina announced more new jobs than ever before – all suggesting that perhaps the business environment was already favorable. In fact, a common theme across these pre-tax reform accolades was that there were several other important attributes that North Carolina brings to the table like a tech-ready workforce, world-class universities, quality of life and a friendly business regulatory environment. This has led advocacy groups like Carolina Forward to provide evidence questioning whether corporate tax rate reductions have merit and whether further reductions in corporate income taxes have the potential to provide diminishing returns. 

While the state of North Carolina collects significant taxes from corporate income taxes, it is important to point out that in 2020, this only equated to a little under $1.5 billion, which is less than 5% of total state income tax collections. In fact, it is the tax on individual income that raises over half of all tax collections in North Carolina. Consequently, if North Carolina continues to bring in new businesses and their employees due to the state’s favorable business tax environment, then the lost tax collections from a 0% corporate income tax rate may be dwarfed by the increase in tax revenues from a greater number of individuals who are paying individual income taxes.