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Franchise Tax Changes Moving Forward

| Tax Policy & Competitiveness

One of the business community’s top priorities on your 2019 Jobs Agenda was reducing the burdensome and regressive franchise tax. This tax, which only 16 states still levy on businesses, is an outdated and unnecessary threat to North Carolina’s competitiveness. Making these much-needed reductions will allow businesses to create new jobs and give back to their communities, bolstering local and regional economies. We were pleased to see the Senate moved legislation forward to make these changes and encourage the House to take up Senate Bill 578 as soon as possible.

Right now, the franchise tax is essentially 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.”

Further, the franchise tax disproportionately affects new businesses interested in growing their footprint in our state. 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 business owners could choose to expand and grow their net worth in states where they aren’t charged this burdensome tax. With a reduced franchise tax, those business owners may instead choose to invest here in North Carolina—essentially growing the economic pie in their communities and across the state.

We are encouraged to see progress on this reform at the General Assembly and will continue to urge legislators and the governor to take this important step for North Carolina’s jobs creators.