A new tax climate study released today by the NC Chamber Foundation finds that North Carolina offers one of the most competitive business tax environments in the country and identifies targeted reforms that could further strengthen the state’s position for business investment and growth.  

The NC Chamber Foundation commissioned North Carolina Business Tax Climate: Current Conditions and Options for Change to provide a comprehensive assessment of North Carolina’s state and local tax structure. Conducted by EY in conjunction with the Council On State Taxation (COST), the study compares North Carolina with 10 benchmark states and examines tax burdens across businesses with different financial profiles. 

The analysis finds that North Carolina’s total effective business tax rate is 3.2% of gross state product, the lowest across all benchmark states and well below the 4.5% national average. The study identifies elimination of the franchise tax as the most significant opportunity to further improve North Carolina’s competitiveness. 

“North Carolina has built a strong tax environment that supports investment, job creation, and economic growth,” said NC Chamber Foundation President Meredith Archie. “This research provides a clear picture of where North Carolina stands today and reinforces the importance of continuing to evaluate our competitive position. To stay highly competitive, North Carolina must continue to monitor the national landscape, identify opportunities for improvement, and build on the strengths that have made our state a leading place to do business.” 

Key Findings 

The analysis demonstrates the strength of North Carolina’s overall business tax climate: 

• North Carolina is competitive across major business tax measures. Corporate income tax collections as a share of GSP are 63% below the national average, while property tax collections as a share of GSP are roughly one-third lower than benchmark and national averages. 

• Businesses pay 38.9% of North Carolina’s state and local taxes, the third-lowest share among benchmark states. This compares with a range of 36% in Michigan to 60% in Texas. 

• Tax collections have continued to grow even as rates have come down. Since 2015, sales and use tax collections more than doubled, increasing 109%, while individual income tax collections grew 60% and corporate income tax collections grew 15% even with significant income tax rate reductions. 

Building on North Carolina’s Tax Competitiveness 

The report identifies North Carolina’s franchise tax as the most significant opportunity for continued tax modernization. Taxes on net worth are increasingly uncommon nationally, with 11 states repealing franchise taxes over the past 25 years and only nine states continuing to impose unlimited taxes on net worth or capital stock. North Carolina’s franchise tax generates just 1.8% of total state tax revenue, but because it taxes net worth rather than profitability, it can disproportionately burden well-capitalized businesses in the growth and investment stage, including the innovative companies North Carolina is competing to attract and retain. 

The analysis also identifies additional opportunities to strengthen North Carolina’s tax competitiveness and taxpayer-friendliness, including modernizing the sales tax treatment of business inputs, improving tax appeals and administration, simplifying corporate filing requirements, and modernizing federal tax adjustment reporting. 

EY’s Quantitative Economics and Statistics practice, in conjunction with the Council On State Taxation, conducted the analysis for the NC Chamber Foundation. The study compares North Carolina with Florida, Georgia, Indiana, Michigan, New Jersey, Ohio, South Carolina, Tennessee, Texas, and Virginia and evaluates tax burdens for representative businesses with different profitability and asset profiles

The full report is available here.