The North Carolina Senate voted Thursday to reduce the franchise tax, a step toward eliminating it entirely.
The franchise tax is levied on corporations that do business in North Carolina. Republicans in the General Assembly want to eliminate the franchise tax, which they describe as a double property tax on businesses in North Carolina.
While Republicans touted their latest tax cut as being good for business and jobs, Democrats worried about the loss of tax revenue, which would be about $1 billion over five years.
Sen. Paul Newton, a Mount Pleasant Republican, called the franchise tax, which would be reduced by a third over the next five years, a “job killer.”
The Republican-written state budget that was vetoed by the governor included reducing the franchise tax, but progress on the budget is stalled four months into the new fiscal year.
However, some of the tax cuts in the vetoed spending plan are moving through the legislature as “mini budgets,” including the franchise tax reduction.
Senate Bill 578 would reduce the franchise tax by a third and increase film grants. The Senate tentatively approved the bill by a vote of 31-8 on Wednesday and it passed it 32-18 on its third and final reading on Thursday. It now goes to the House.
Sen Jerry Tillman, an Archdale Republican, called it a “pretty onerous” tax.
“It’s a big ‘you’re not welcome’ sign sitting at the border saying you’re going to pay a tax ... for doing business,” Tillman said in a Senate Finance Committee meeting on Tuesday.
Republicans said they expected Gov. Roy Cooper, a Democrat, to veto it. So does Sen. Floyd McKissick Jr., who objected to the bill in committee.
McKissick told The News & Observer that North Carolina is already extremely competitive for businesses and that he doesn’t think the franchise tax impacts that.
“It has not stemmed the flow of businesses to North Carolina. HB2 had the greatest impact,” McKissick said, referring to the state law that banned using a restroom in a government building that didn’t correspond with the gender on one’s birth certificate, and was later replaced.
Newton described the reduction of the franchise tax as an investment in the state’s future economy. Sen. Ralph Hise, a Spruce Pine Republican, said it could help raise residents’ income by improving their jobs outlook.
McKissick described tying together the franchise tax and film grants as a “poison pill” since he is in favor of the film grants, but voted against the bill.
Also this week, Cooper announced a new Governor’s Advisory Council on Film, Television and Digital Streaming to “lead efforts to continue growing North Carolina’s successful film industry.”
Franchise tax and business attraction
Jared Walczak of the Tax Foundation — a think tank in Washington — told the N&O that franchise taxes are “a relic of an earlier era.” Just 16 states still have the tax.
“North Carolina’s remains a significant source of state revenue, but the state will become much more attractive for a broader range of businesses and business investment if it can reduce its reliance on this outmoded tax,” said Walczak, director of state tax policy for the Tax Foundation.
“North Carolina’s considerable success in reducing individual and corporate income tax burdens is muted somewhat by its heavy reliance on an antiquated franchise tax, imposed on business net worth. Corporate income taxes fall on a business’s profits, while capital stock taxes like North Carolina’s franchise tax fall on the business’s assets, even if the company is not currently profitable, or only marginally so,” Walczak said in an email.
Walczak said franchise taxes discourage in-state investment and can be burdensome for new businesses that need to invest heavily before turning a profit.
“The franchise tax is an onerous and regressive tax on North Carolina businesses that discourages them from investing in our state,” NC Chamber President and CEO Gary Salamido said in a statement to the N&O.
“The much-needed changes in this bill will unburden businesses, allowing them to create new jobs, give back to their communities and bolster local and regional economies,” Salamido said.
However the North Carolina Justice Center, a left-leaning organization, said the state should reform, not eliminate the franchise tax.
Alexandra Forter Sirota, director of the Justice Center’s Budget & Tax Center, called it “another corporate tax break.”
When Cooper vetoed the state budget at the end of June, he said it prioritized the wrong things and valued “corporate tax breaks over classrooms,” among other issues.
The franchise tax budget bill will still need to pass the House before going to the governor.
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