Ten years ago, in 2011, North Carolina ranked among the least competitive states for business taxes according to the nonpartisan, nationally focused Tax Foundation research group.

What a difference a decade has made.

Today, in 2021, the Tax Foundation ranks our state among the ten best business tax climates nationwide, with some of the most competitive real-world tax rates across business types. This meteoric rise is thanks in large part to forward-thinking tax and unemployment insurance (UI) reforms enacted by state leaders throughout the previous decade, with persistent support from the NC Chamber and our pro-growth allies. Now with last week’s passage of a bipartisan state budget containing key tax improvements backed by the NC Chamber, North Carolina’s business tax climate appears poised to rise even higher.

That budget, which garnered support from a broad consensus of North Carolina legislators – both Democratic and Republican – earned swift praise from the Wall Street Journal’s editorial board for offering leaders elsewhere a working model for sound, bipartisan fiscal decision-making. With this year’s budget, the Journal’s editorial board explained, North Carolina’s elected leaders steered clear of the misguided path taken by other states to pass “new structural spending burdens that will be difficult to shrink in the next recession.” Instead, lawmakers here wisely took a multibillion-dollar surplus and returned a sizeable amount back to North Carolina’s citizens and job creators in the form of reduced tax burdens, while making targeted investments in major statewide priorities like infrastructure modernization.

Key NC Chamber-supported tax reforms secured in the budget include:

• A reduced and simplified franchise tax on business assets that removes the two most burdensome of three bases previously used to tax the highest-yielding base, ensuring instead that all companies are taxed on the same streamlined formula: $1.50 for every $1,000 of the company’s net worth in North Carolina. This will lower costs and complications for most businesses and help make our communities even more enticing to companies with asset-rich investments.
• Phased reduction of the personal income tax rate from 5.25 percent to 3.99 percent (PIT applies to many smaller businesses that operate as passthrough entities).
• Federal conformity regarding taxation of Paycheck Protection Program loans. This allows North Carolina businesses – like businesses in many other states – to deduct expenses paid with these loans when filing state taxes.
• Extension of the Mill Rehabilitation Tax Credit until 2030 and extension of the Historic Rehabilitation Tax Credit until 2031. These credits provide important incentives enabling our state to spur economic development in smaller communities and rural areas.
• Increased child tax deduction of $500 more per child, with a new maximum deduction amount of $3,000.

The forward-thinking approach to taxing and spending adopted in this year’s budget is projected to sustain a healthy “rainy day” balance of $4.25 billion in our Savings Reserve Account by the end of the fiscal biennium in June 2023. Combined with major investments to modernize North Carolina’s transportation, broadband, public education, and water and sewer infrastructure, it’s clear that our elected leaders have made firm commitments to our state’s economic security in the final budget.

Another sound decision made recently by the General Assembly, this one with unanimous approval from voting members, will also support a more welcoming fiscal environment for job creators. Senate Bill 311, signed by Gov. Cooper on Nov. 10, contained a measure preventing a triggered rise in the base UI tax rate paid by employers to fund our state’s well-financed UI system, freezing that rate in place at 1.9 percent through 2022. The measure was an extension of a similar measure in Senate Bill 114, whose passage earlier this session our team worked hard to ensure.

The NC Chamber applauds lawmakers from both sides of the aisle for putting North Carolina, our job creators, and our communities first as they close out this legislative session. We are thankful to work with these leaders to drive growth and success across our state. For questions about the NC Chamber’s 2021 tax priorities or to discuss which reforms we might push for next, contact NC Chamber Director of Government Affairs Mark Coggins.

Additional beneficial tax changes included in this year’s budget which were not necessarily advocated for directly by the NC Chamber include:

• Higher zero-tax bracket thresholds for married individuals filing jointly and surviving spouses ($21,500 to $25,500), heads of household ($16,125 to $19,125), and single individuals and married filing separately ($10,750 to $12,750).
• Elimination of the state income tax on military pensions.
• Phased elimination of the corporate income tax rate (now at 2.5 percent) by 2030, with phaseout starting in 2025. Not too long ago, our state had the highest corporate tax rate in the Southeast.