Loading...
A BYH to the dry-rainy poster (“When it rains it pours”). You conflate LOCAL weather with GLOBAL warming. Please get to...

Time for state to reconsider its franchise tax

Roy Cordato

Roy Cordato

Loading…

Monday, February 11, 2019

North Carolina's franchise tax is a punitive and opaque tax levied on businesses organized under one of the usual corporate forms. It is inconsistent with both good economics and good government and should be abolished.

Conceptually the franchise tax is quite simple. It is a tax on the net value or worth of corporations with operations in the state. Net worth is defined as a business's total assets minus its total liabilities. 

North Carolina’s franchise tax is, in fact, a corporate tax placed on top of the existing corporate income tax. The difference is that it is not levied on business income but on the value of its assets. 

A standard principle of taxation is that expenditures on assets like equipment should be fully deductible from income. The franchise tax is a back-door method allowing the state to tax the value of these purchases after the fact.

Imagine that a construction company purchases a bulldozer. When the company goes to pay its income tax, this bulldozer is a deductible expense. But once the purchase is made, the bulldozer becomes part of the company's stock of capital equipment and therefore part of its asset base. When it is purchased, the value of the bulldozer is deducted under the corporate tax. But once the firm owns it, that same value does get taxed year after year under the franchise tax.

This is not only bad economic policy but an underhanded way of taxing something that shouldn't be taxed at all. It is also a way of decoupling a business' tax liability from how well it performs economically. Even in bad years, when the company might be losing money, the state will still require it to pay this tax on its previous asset purchases.

Viewed in conjunction with the corporate income tax, this is clearly a case of double taxation. It makes no difference that the revenue that went into purchasing the asset is fully deductible under the corporate income tax. The value of the asset comes from the fact that it generates future income, and this will be reflected in the assessed valuation of that asset. That income will be taxed as part of the corporate income tax.

The corporate income tax reduces the value of the asset. So, to tax both the asset and the income that it generates reduces the value twice. The franchise tax not only discourages investment in the accumulation of assets, it is also punitive. As the Tax Foundation notes in their critique, "taxing a company based on its net worth disincentivizes the accumulation of wealth, or capital, which can distort the size of firms and lead to harmful economic effects."

If North Carolina eliminated its franchise tax, its ranking in the Tax Foundation's "state business tax climate index" would improve from 12th in the nation to 11th and in their sub-ranking for property and wealth taxes the state would move from 33rd to 16th.

Maybe the most pernicious aspect of the tax is its implications for honest and transparent government. It is a hidden tax whose burden is not borne by the businesses upon which it is levied but instead by its customers, employees, and shareholders.

The franchise tax, like all taxes, comes out of the pocket of real people. When the franchise tax is levied, customers will pay in the form of higher prices, employees will pay in the form of lower wages, and shareholders will pay in the form of smaller returns. But none of these people actually see a bill labeled "franchise tax." It is a completely non-transparent tax and is therefore inconsistent with principles of good government.

For citizens to know what government is costing them, they must be made keenly aware of how much they are paying in taxes. Obfuscating these costs by using forms of taxation like the franchise tax and the corporate income tax works well for politicians who want constituents to believe that they are getting something for nothing. On the other hand, it is a great disservice to the residents of the state who, as voters, need to be as informed as possible.

Roy Cordato is vice president for research and resident scholar at the conservative John Locke Foundation.

Loading…

Humans of Greenville

@HumansofGville

Local photographer Joe Pellegrino explores Greenville to create a photographic census of its people.

Op Ed

June 10, 2019

The New York Times 

“Because it’s there.” For those who grew up on George Mallory’s famous explanation for his yearning to scale Mount Everest, with all the romance, danger and spirit of exploration it implied, that viral photograph of an endless line of climbers in…

June 10, 2019

Although it may not appear so, the leaders of both major political parties in North Carolina favor lowering the tax burden of large businesses. Their real dispute is about the scope and magnitude of the tax relief.

Democratic Gov. Roy Cooper has consistently opposed recent state budgets, crafted by…

john hood.jpg

June 10, 2019

We are just weeks away from the first of 20 Democratic debates scheduled this primary season. It gets underway over two nights in Miami on June 26 and 27, and never before has there been a debate this early in the election and potentially this important.

The reason there are so many candidates, 23…

eleanorclift.jpg.jpg

June 09, 2019

Gerrymandering has always been part of American politics. After all, the term was coined in 1812 after Massachusetts governor and Founding Father Elbridge Gerry endorsed a state senate district that resembled a salamander.

Until recently, federal courts have been highly reluctant to enter the…

Steve and Cokie Roberts

June 09, 2019

It is not unfair to point out that President Trump, on many important subjects, is just an ignoramus.

A vivid illustration of this unfortunate fact came this week in London, when it was revealed that Prince Charles, a knowledgeable environmentalist, had tried to educate the president on climate…

Eugene Robinson

June 09, 2019

"When you are told all your life you're dumb, unworthy, you start believing it. God changed that for me."

Jerry, from Youngstown, Tennessee, hesitated to be interviewed by Chris Arnade, because "I don't know my ABCs, so I can't really talk right." He told Arnade, the author of the new book…

kathrynlopez

June 09, 2019

Senate Republicans are pushing back on President Trump's plan to impose tariffs on Mexico. But if Mexican officials think these Republicans are going to save them from Trump's tariffs, it's time for them to think again.

So far, congressional Republicans have managed to remain bystanders in Trump's…

MarcThiessen

June 08, 2019

In 1940, some 3.6 million people lived in North Carolina, ranking the state 11th in the nation in population and first in the Southeast. Across the South as a whole, only Texas (6.4 million) was more populous.

If present trends continue, by 2040 North Carolina will have a population of about 12.7…

john hood.jpg

June 08, 2019

The Charlotte Observer

How much money is too much for a high school football coach? North Carolina’s second largest school district has provided something of an answer.

Last month, Vance High School coach Aaron Brand cashed in on a successful five-year run in Charlotte and accepted a coaching…

June 08, 2019

In 1788 the Hillsborough Convention convened to consider ratification of the U.S. Constitution and also to approve an “unalterable” seat of government. They did neither.

The Constitution, they determined, lacked assurances of personal rights the delegates deemed essential and, after…

Tom Campbell
239 stories in Op Ed. Viewing 1 through 10.
«First Page   «Previous Page        
Page 1 of 24
        Next Page»   Last Page»