All corporations doing business and chartered in North Carolina pay a flat tax of 6.9 percent of their net taxable income.
Under North Carolina law, a corporation can be a joint stock company or association, an insurance company, a domestic company (organized under state laws), a foreign company (organized under laws other than those of North Carolina), or a limited liability company.
Not all businesses, however, pay the corporate income tax. Many companies, in particular smaller firms operating as a sole proprietorship, partnership, or S Corporation, pay under the personal income tax provisions. The personal income tax brackets range from 6.0 percent to 8.0 percent, with many smaller firms taxed at the higher rate.
While personal income tax rates have increased in North Carolina – because of the repeated renewal of a “temporary” tax hike passed in 2001 – the corporate income tax actually declined during the late 1990s:
In addition, a variety of exemptions and credits make the effective corporate income tax rate much lower – perhaps by as much as half – than the 6.9 percent rate would indicate. In fact, when measured in proportion to each person’s overall tax burden, North Carolina’s corporate tax burden is almost 10 times less than the individual income tax burden. Thus the personal income tax burden, on average, equals 3.2 percent of personal income while the corporate tax burden only represents 0.3 percent of personal income. To put these numbers into perspective, consider that in 2005 the state collected about $8.4 billion in individual income taxes, but only $1.27 in corporate income taxes.
Still, the corporate income tax remains an important source of revenue for the state. For the past three years the corporate income tax was the third-highest revenue generator, with only sales and use taxes and individual income taxes generating more revenue. The amount of money derived from the tax, however, fluctuates from year to year, depending upon the economy. For FY2004-05, the corporate income tax accounted for 7.7 percent, or $1.2 billion, of all tax revenue taken in by the state. In 2003-04, the tax accounted for 5.6 percent of total revenue; in 2002-03, 6.4 percent.
Economists frequently note that high corporate income taxes have an adverse impact on economic growth (cf. Lee & Gordon, 2004). All things being equal, businesses are more likely to relocate to states that have lower corporate tax rates. At the current 6.9 percent rate, North Carolina’s high taxes place it at a disadvantage with neighboring states. By comparison, Tennessee’s corporate income tax rate is 6.5 percent; Georgia and Virginia charge 6.0 percent; Florida’s is 5.5 percent; and South Carolina’s is 5.0 percent.