A press release from Gov. Roy Cooper’s office this week included a quote heralding the importance of small business to North Carolina’s economy. But does he mean it?
Cooper recently vetoed the state budget in large part because it included reducing an antiquated business tax affecting small businesses. That tax cut is likely to pass in a separate bill before the General Assembly (Senate Bill 578), but it’s taken as a given that Cooper will veto it.
The business tax in question is the franchise tax. Only 15 other states still have this tax, which amounts to a double tax on business assets. Here’s what the franchise tax is and why it’s a sneaky back door to taxing small businesses, let alone large corporations:
- It’s a tax on a business’s net value or worth
- The tax’s floor is so small ($200) even the smallest business can’t avoid it
- It’s a tax on a business in addition to the corporate income tax
- It’s a tax on what the business’s assets are worth, not what it earns
- So a business’s expenditures on capital and equipment, fully deductible from the corporate income tax, end up being taxed after all, under the franchise tax
There are nearly 900,000 small businesses in North Carolina, comprising 99.6 percent of North Carolina’s businesses.
No tax relief for you, but maybe one of my Specially Favored Businesses will patronize you
Gov. Cooper’s office wants to justify direct handouts (“grants”) and tax cuts (“tax incentives”) to just one industry — film productions — because they’d patronize small businesses in North Carolina.
This is important, we’re told, because “small businesses help drive the economy and employ our North Carolina residents.”
So why not jump on the opportunity for tax cuts (franchise tax cut) for all businesses in North Carolina, small businesses and the large businesses that also patronize our small businesses? (SB 578 even includes a section making it easier for a film production company to qualify for a film grant.)
Because Cooper’s preference is clear, and it’s not really for helping small businesses. There are four policy combinations of corporate taxes and corporate welfare, and Cooper’s choice is obviously Central Planning & Cronyism: High corporate taxes, high corporate welfare.
This combination requires taking more resources from producers and households to be directed at the whim of the political class. Of the range of choices, it’s the proven way to slow economic growth — but empower politicians.
No surprise, but such a preposterous* approach to has been shown to have overall harm to the North Carolina economy. A 2019 study by economist J.C. Bradbury for Western Carolina University’s Center for the Study of Free Enterprise, “What Do Film Incentives Mean for North Carolina’s Economy?“, found that:
North Carolina’s film incentives, which have cost the state over $400 million, do not appear to have delivered the promised economic boost. For this reason, policy makers may wish to reconsider the state’s commitment to the incentives.
*Note: “Preposterous” comes from the Latin praeposterus (“with the hinder part foremost“). Basically it’s how the Romans called something ass-backwards.