March 2006 - Foundation for NC Future

March 2006 Article

There is an old saying, “What’s sauce for the goose is sauce for the gander.” What that means is that if a public policy is good for one segment of our society it should be good for all parts of society. In government, that should especially hold true for tax policy. All too often, however, it doesn’t.

About this time last year, NC State Senate Leader, Marc Basnight, sent a letter to a constituent where he defended the state’s corporate tax policies. Senator Basnight’s letter states in part as follows:

“Our corporate income tax applies on a “separate entity” basis, which allows corporations to engage in strategies to shift income among affiliates so as to reduce or eliminate the amount of income reportable to our state. In addition, our state does not have “throw our” or “throw back” rules that ensure that the income of a multi-state corporation is taxable at the state level. Finally, our corporate income tax has some loopholes, exemptions, and credits – such as the bank tax loophole and the credit for savings and loan supervisory fees – that benefit only certain groups of businesses. Due in part to these and other factors, our effective corporate tax rate is well below 6.9% for many businesses.”

Senator Basnight goes on to say:

“According to a recent national study, the effective state tax rate was 0.1% for BB&T, 2.4% for Bank of America, and 3.7% for Lowe’s, to mention just a few examples. The study also found that the effective state corporate tax rate for the 252 largest companies in the nation was only 2.3% and that the average statutory state tax rate was 6.8%, which is very closely aligned with North Carolina’s statutory rate. Clearly, if our state’s tax structure were modified in accordance with the previous suggestions, the effective rate would increase while the statutory rate for all businesses could be reduced significantly ( note: my underlining). I would be interested to hear your thoughts on how we can restructure the corporate income tax to lower the statutory rate.”

I have no problem with either the companies Senator Basnight names or the tax rates they pay. It is smart business to maintain a favorable tax rate. But this illustration begs the fact that if selected corporations paying fractionally smaller tax rates than other, smaller businesses is good for North Carolina, wouldn’t it be even better for our state if all businesses paid lesser rates?

I have to admit that if I were the neighborhood hardware store or real estate company that paid the full 6.9% corporate rate, I would be discouraged by the unfair tax treatment. It is a widely accepted economic fact that 70% of new job creation is generated by small business. And thus, for all these reasons, Senator Basnight’s letter, albeit unintentionally, highlights better than I ever could, the reason we need lower and more competitive tax rates in North Carolina as well as reform how our state can operate more cost efficiently.

During election years ( and 2006 is one ) finding candidates for office eager to go to Raleigh and bring our bureaucratic behemoth to bay is really easy – almost everyone agrees and supports that agenda. Funny thing is though, that once there much of that eagerness is slowly muted and diverted by older capital veterans who know the rules and have successfully jousted with rookie legislators before. (Dinner invitations and invitations to lobbyist sponsored golf tournaments are very important in Raleigh.) Such patience is why bureaucracies rarely change and survive only to grow bigger and chew up more money. Nonetheless, many of our neighboring states (and competitors for new jobs) have attempted reform. Governor Mark Warner (D-Virginia) a $ 1 billion deficit when he took office. He turned that deficit into a surplus. Governor Mark Sanford (R-South Carolina) has attacked many “sacred cows” in his state and reforming state government has been – and still is – his number 1 priority. Governor Mitt Romney (R-Massachusetts) has done a phenomenal job in a traditionally liberal northeastern state with making successful, fundamental changes in how our state operates. Leadership…these governors made the promise and have tried mightily to keep their word. And North Carolina? Well, North Carolina was rated 37th in the “Ranking of Relative Government Burdens on Small Business” – behind South Carolina (13th), Virginia (15th), Georgia (22nd), and Tennessee (16th) - in 2004 by Small Business Survival Committee.

What kind of reform? Top to bottom. Look at every department and eliminate unnecessary and duplicative layers of management; write a fair and uniform tax code that benefits small businesses as well as big ones; cut the over $ 600 million of pork; fix and build our roads which have fallen into hideous disrepair; pass tort reform so that doctors and businesses will see that North Carolina is a good place to locate; put the education “administrators” back into the classrooms and if they don’t want to go, eliminate their jobs; and let North Carolina be known for clean water, clean air, and fair taxes. Folks, we are not talking “rocket science” here. These suggestions are pretty basic. People in government love to tell the public how complex government is and how you must be careful lest you interrupt the delicate balancing act and thoughtful deliberations that must go on to achieve fairness for all. Number one, government isn’t all that complicated. And number two, the only “delicate balance” that might be disrupted is the removal of the insider’s and lobbyist’s hands from your collective wallets.

I do not – and cannot – understand a system that says its “good business” to reduce tax rates for big business but “bad business” to extend those same tax rates to everyone else. It is no wonder that many major companies in North Carolina have no desire whatsoever to reform either our state or our tax code - it works for them.
However there is a fundamental issue of fairness to others in our state who work equally as hard and are as important as any others in providing jobs and economic development for our state. Go back and reread Senator Basnight’s argument for keeping tax laws right where they are: “…if our state’s tax structure were modified in accordance with the previous suggestions, the effective (tax) rate would increase while the statutory rate for all businesses could be reduced significantly ( my emphasis). Put another way, let’s sacrifice the many to benefit the few. And keep in mind that he apparently thinks this is good public policy. There is an alternate plan – that is to reduce the size, scope and cost of government to enable us to reduce the tax rates for small business commensurate with the lower rates now being paid by major corporations
“Tax reform” in North Carolina is a lot like the weather…many people talk about it but end up doing nothing. If you think the current system is fair and just then sit back and tune out. If on the other hand you are appalled at how blatantly skewed our tax system has become then you need to call…and call…and write…and then call and write some more…and then go vote. If you don’t, then what you see is what you’re going to get.