Myth vs. Fact on the Franchise Tax

| Tax Policy & Competitiveness

One of the top priorities on our 2019 Jobs Agenda is capping, reducing and eventually eliminating the regressive franchise tax. That’s why we are supporting Senate Bill 622, the Tax Reduction Act of 2019, which will lower the franchise tax rate by moving North Carolina from $1.50 per $1,000 to $1.00 per $1,000 over the next two years.

Reducing the franchise tax will remove an unnecessary burden on North Carolina businesses, allowing them to create new jobs, give back to their communities and bolster local and regional economies. However, some recent news reports have mischaracterized the franchise tax and its effects on North Carolina’s workers and job creators. Let’s review the myths and facts at play in this discussion.

MYTH: The franchise tax pays for state services like roads. Eliminating it would take funds away from North Carolina’s infrastructure needs. 
FACT: The franchise tax does not pay for state services like roads, period. Funding for infrastructure comes from the highway use tax, motor fuels tax and DMV fees. We have long opposed the practice of using other sources of revenue to pay for infrastructure and successfully advocated for the passage of House Bill 4 in 2013 that ended the practice of using funds from the unemployment insurance system to fund roads, highways, bridges and more.

MYTH: The “double-dipping” of the franchise tax is fair because other state and local tax systems engage in multiple taxation.
FACT: While “multiple taxation,” or paying taxes to the appropriate authorities at each level of government are expected, the franchise tax does levy a double tax on businesses at the state level. According to the nonpartisan Tax Foundation: “Some states with both a corporate income tax and a franchise tax allow businesses to pay one or the other, whichever amount is higher. But North Carolina is among the states requiring businesses to pay both, which increases tax burdens and compliance costs and applies duplicative layers of taxes on the same income.”

MYTH: The franchise tax has no impact on economic development or recruiting new businesses to come to North Carolina.  
FACT: New businesses in North Carolina are actually disproportionately affected by the franchise tax. Again from the Tax Foundation: “Franchise taxes can be especially burdensome to new businesses, capital-intensive businesses, and struggling businesses because they are owed even when businesses post losses or barely break even. As a result, many businesses have to reach into their valuable cash flow to pay the tax.” Additionally, because the franchise tax is levied on a business’s net worth rather than their net income, it discourages in-state investment and the accumulation of assets—many businesses could choose to expand and grow their net worth in states where they aren’t charged this burdensome tax.

MYTH: Businesses in North Carolina pay the lowest taxes in the country.
FACT: Several states levy no taxes on businesses at all, and North Carolina’s tax climate is ranked only 12th most competitive in the country. We have long supported balanced, commonsense tax reforms that enable job creation and economic growth, and those reforms played a major role in North Carolina’s ranking as the #1 state for business in the country for two years running.

MYTH: Changes to other taxes, like the unemployment insurance taxes, mean communities aren’t getting the funds they need to thrive. 
FACT: The unemployment insurance system, which is funded 100% by North Carolina’s employers, does not provide funds for state services. It only provides unemployment benefits to workers. In fact, the system couldn’t have paid for any additional services in our state before we fought for critical reforms in 2013. After businesses contributed more to repay the state’s $2.6 billion debt to the federal government and replenished the reserve fund, the system became solvent and today is ready to weather another economic downturn. At that time, we also fought to ensure that the funds employers pay into the unemployment insurance system remain in that system—that practice was codified with the passage of HB4 in 2013. Read more here.

Solving many of the challenges facing our state, like developing a skilled workforce and strengthening our transportation infrastructure, will certainly take a complex approach with lots of stakeholders and solutions. However, the argument in favor of keeping the franchise tax in place as-is (or reforming it slightly) to support those goals simply misses the mark.

We’ll continue to advocate for a cap, reduction, and eventual elimination of the franchise tax to support the job creators in our state who are helping spread economic opportunity for everyone. For any questions on the franchise tax or other tax policy, please contact Jason Soper.

Sincerely,

Gary J. Salamido
Chief Operating Officer and Acting President
NC Chamber