Editor’s Note: Lawmakers in North Carolina are considering several pieces of legislation that would make beneficial adjustments to our burdensome franchise tax. Both House Bill 334 – a bill backed by the NC Chamber – and the N.C. Senate’s proposed budget would make sensible changes to simplify the franchise tax and save job creators millions of dollars on your bottom lines. If this harmful tax is an impediment to your business, we encourage you to contact your representatives in the N.C. House and N.C. Senate and tell them the time has come to step to the plate and streamline North Carolina’s duplicative and overly complicated franchise tax.

Next week, the NC Chamber is excited to partner with the Economic Development Partnership of North Carolina (EDPNC) to unveil a new white paper that tells the story of our state’s increasingly competitive tax climate. The report, authored by experts with the nonpartisan Tax Foundation research group, speaks to the wisdom of sweeping tax reforms first enacted by our elected leaders in 2013, with strong support from the NC Chamber. At the same time, the paper highlights a notable problem that continues to hang over North Carolina’s business tax climate: our regressive, duplicative, and overly complicated franchise tax on business assets.

Thanks to the previous decade’s reforms, North Carolina now boasts a well-balanced tax climate anchored by the lowest corporate income tax rate in the country (2.5 percent) and a nationally competitive personal income tax levied on a flat rate of 5.25 percent. And this tax climate is earning national recognition, including a 10^th-place finish in the Tax Foundation’s latest annual State Business Tax Climate Index and strong marks in another recent Tax Foundation analysis, Location Matters. Location Matters found that North Carolina businesses enjoy some of the lowest effective tax rates in the nation. However, it also found that new capital-intensive manufacturers in our state don’t fare quite as well as other business types relative to similar firms in other parts of the country.

This higher relative tax burden for capital-intensive manufacturers stems in part from North Carolina’s imposition of an uncapped franchise tax that targets tangible business assets, which can pose quite a burden on businesses with high upfront capital costs. Levied in addition to the corporate income tax, the franchise tax presents a duplicative tax that, in recent years, has hit our state’s businesses almost as hard as the corporate tax – $646 million in 2020, compared to $657.8 million in corporate revenues. Contributing to an even heavier burden for many employers is the fact that the franchise tax is assessed on the highest of three tax bases: a business’s apportioned net worth, its net investment in property, or 55 percent of its appraised property tax value.

Franchise taxes (which are also known as capital stock taxes) have grown increasingly uncommon of late as states have recognized these taxes as a major impediment to new investments. Only 16 states continue to impose such a tax, and four of these are phasing out their franchise tax. Currently, legislators in North Carolina are considering targeted reforms to our franchise tax. Both House Bill 334 – for which the Chamber has signaled support – and the N.C. Senate’s proposed state budget would simplify the franchise tax so that it is assessed only on a net worth base.

This adjustment, in addition to streamlining tax calculations and reducing administrative complications for many businesses, would result in direct bottom-line savings for the vast majority of job creators throughout the state. Across our business community, these savings would likely exceed $150 million each year. While we ultimately would like to see this regressive tax lifted entirely, we believe this formula change would constitute another major leap forward for our tax code – and for the overall attractiveness of our investment climate.

As North Carolina emerges from the pandemic to compete on a new economic playing field, it has never been more important that we present the most welcoming front to businesses in all industries. And with recent forecasts showing our state in a historically strong position revenue-wise, the time has never been more favorable to make targeted reforms to our tax code that will support our long-term competitiveness. In the days and weeks ahead, the NC Chamber will continue to urge legislators to simplify our overly complicated franchise tax, whether through the passage of House Bill 334 or another legislative vehicle.