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Bill to eliminate corporate income tax reaches NC Senate floor
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Bill to eliminate corporate income tax reaches NC Senate floor

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A state House bill that would gradually eliminate the state’s corporate income tax advanced Tuesday to the Senate floor.

The Senate Rules and Operations committee recommended House Bill 334. It is likely to be added to the Senate floor agenda for Tuesday's 4 p.m. session.

Senate Republican bill sponsors used the "gut-and-replace" strategy to add the corporate income tax provision to HB334, which cleared the House as a bill focused on the federal Paycheck Protection Program.

If the Senate clears its version of HB334, the House would either approve of the changes or reject them, which would likely lead to a concurrence committee in an attempt to reach a compromise.

The latest version of HB334 contains several tax-related proposals, perhaps foremost reducing the corporate income tax rate from 2.5% currently to 0% in 2028.

The 2.5% rate is the lowest among the 44 states that have a corporate income tax.

Senate Republican bill sponsors added some sweeteners to HB334 to make its passage potentially more palatable for Senate Democrats and Democratic Gov. Roy Cooper.

Senate Democrats warn that ending the corporate income tax would cost North Carolina between $500 million and $600 million in annual tax revenue that could be used for education, infrastructure and public health initiatives.

HB334 also would lower the state income tax from 5.25% to 4.99%, while the state's child-tax deduction would increase by $500 to a maximum $3,000 annually for families who claim the federal child tax credit.

The personal income tax deduction would be increased from $21,500 to $25,000 for a married couple, from $16,125 to $19,125 for a head of household, and from $10,750 to $12,750 for single taxpayers. Those changes would take effect Jan. 1.

According to a legislative fiscal staff note, the state would lose a projected $584.3 million in personal income tax revenue in fiscal 2021-22, along with $1.29 billion in 2022-23, $1.32 billion in 2023-24, $1.36 billion in 2024-25 and $1.4 billion in 2025-26.

HB334 also takes $1 billion from the federal American Rescue Plan Act — which no member of the state's GOP congressional delegation voted for — to provide one-time jobs grants to businesses that could be worth up to $250,000.

Qualifying businesses would have to demonstrate they "suffered substantial economic damage" from the pandemic "for which they were otherwise not fully compensated by providing economic support."

Ford Porter, a spokesman for Democratic Gov. Roy Cooper, said that "we have a once-in-a-generation opportunity to invest in our schools, quality child care, small businesses, community colleges, transportation, housing and tax cuts for families who really need it.

"The last thing we need is more sweeping tax breaks for corporations and the wealthiest among us instead of investments in our hard-working families and communities."

Motives

State Senate Republicans have insisted for years that getting rid of the corporate income tax is pivotal to North Carolina's long-term economic success.

In 2013, the Republican legislative super-majority passed bills signed by then-Gov. Pat McCrory that reduced the rate from 6.9% in 2013 to 2.5% in 2019. The 6.9% rate dates back to 2003.

Analysts have cautioned the GOP legislators that achieving their goal could unleash socioeconomic and political ripples, making the state even more purple at the statewide level.

They cite as an example that corporations being recruited from liberal-leaning Connecticut, New Jersey and New York typically bring a significant portion of their workforce with them.

The bulk of corporate relocations and new operations have been landing in Charlotte and the Triangle, which have become liberal strongholds in recent years.

Sen. Paul Newton, R-Cabarrus, sought during Tuesday's Senate Rules meeting to emphasize the personal income tax part of HB334. He reiterated his confidence that eliminating the corporate tax rate will lead to more corporations choosing to open in or move locations to the state.

Newton estimated that as many as 250,000 low- to moderate-income North Carolinians "would pay no (state) taxes at all" following the passage of HB334.

Newton said projected annual tax revenue growth will offset the combined loss of $2.07 billion in tax revenue by 2025-26.

Newton said corporations tend to make decisions "more on signals." He said a powerful signal to them would be the certainty of no corporate income tax in 2028.

"They can feel comfortable, profitable and healthy, and their employees would be glad to be here," Newton said.

Newton said that "the Republican philosophy when government collects more money than it needs is to give it back through tax relief, and that's what we're doing here."

Sen. Wiley Nickel, D-Wake, has criticized the current version of HB334, saying that "at a time when corporations are making record profits, and wealth and income inequality is at its highest, they hope to lower taxes on the wealthy and big corporations yet again.

"The Republican tax plan will continue North Carolina’s race to the bottom when it comes to public education."

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