Significant tax policy changes take effect on New Year’s Day in 34 states and more noteworthy fiscal reforms are already poised for passage in January.
Most state legislatures will convene their 2020 sessions in the coming weeks. Governors and legislators in many states will be gaveling in and out relatively quickly this year in order to focus on the upcoming elections. However, good policy often makes for good politics, and there will still be plenty of substantive policy developments in state capitals across the country in the new year.
Focusing on tax policy, lawmakers in two red states – North Carolina and Wyoming – are set to vote on major changes to the taxation of business in the first month of 2020. In North Carolina, the Republican-run General Assembly is looking to provide tax relief to employers with a cut to the state’s franchise tax (referred to in some states as a capital stock tax), whereas the Republicans who run the Wyoming House and Senate are planning to pass legislation that would impose a 7.0% corporate income tax on businesses with more than 100 shareholders.
Wyoming May Impose A Corporate Tax At A Time When Other States & Nations Are Cutting Them
Only two states do not levy a corporate or gross receipts tax on business income. One is South Dakota and the other is Wyoming, but that could change in 2020. At the beginning of 2019 members of the Wyoming House of Representatives, by a vote of 44 to 14, passed House Bill 220, legislation introduced by Representative Jerry Obermueller (R) that would impose a 7.0% corporate tax on companies with more than 100 shareholders.
That tax hike did not make it to the Governor Mark Gordon’s (R) desk this year, as the Wyoming Senate, which Republicans control with a 27 to 3 majority, adjourned the 2019 session back in February without voting on Representative Obermueller’s corporate tax bill. Supporters of that corporate tax proposal, however, are coming back to push this new tax once again in 2020 and are as committed as ever to getting it enacted.
The push to enact a corporate income tax in Wyoming coincides with a growing consensus and mounting body of evidence that much of the burden of corporate taxation is borne to some degree by workers and consumers, not only the owners of capital. As has been previously mentioned in this space, key non-partisan budget scorekeepers have updated their methodology in recent years to account for this reality:
“The Congressional Joint Committee on Taxation (JCT) announced in an October 2013 study that the JCT would henceforth be reporting the affect that corporate taxes and corporate tax changes have on both labor and capital. Prior to that 2013 change, JCT models assumed that the burden of corporate taxes was borne entirely by the owners of capital (stocks, bonds, mutual funds, IRAs and so on).
“That move by the JCT five years ago followed similar model adjustments by the Treasury Department and the Congressional Budget Office that account for the share of corporate taxes borne by labor.”
In addition to depressing economic growth and harming the state’s business tax climate, making Wyoming reliant on a corporate tax would also put the state’s finances on less stable footing. Sven Larson, a Wyoming-based economist and senior fellow with Americans for Tax Reform Foundation, explains:
“A review of data from the states with a corporate income tax, for the years 2015-2017, suggests that:
a) When the economy is doing well and GDP is growing strongly, there is little to be gained in terms of tax revenue from corporations; and
b) When GDP is stagnant or in decline, there are significant drops in corporate income-tax revenue.”
“In other words,” Larson adds, “creating a corporate income tax is a waste of legislative effort. It will alienate businesses and redirect their investments elsewhere.”
Wyoming legislators who are trying to enact a corporate tax in their state sometimes claim, incorrectly, that what they are proposing is not a new tax. In making this false claim, corporate tax supporters in Wyoming often refer to state “throwback rules” when trying to explain, inaccurately and confusingly, that other states are somehow taxing income that ought to be going to Wyoming government coffers. Jared Walczak, the Tax Foundation’s director of state policy, explains how this argument in favor of the proposed Wyoming corporate tax is based on a misunderstanding:
“These throwback rules, though important, can be arcane and are often poorly understood. They are often characterized as the ability for a state to impose its corporate income tax on sales income that is not taxed in another state—and Wyoming, of course, does not tax any such income at present.
“Throwback rules aren’t a way for a state to tax the sales income another state has left untaxed, but rather the sales income that is untaxable, an important distinction,” Walczak adds.
Some fear the corporate income tax is the first step toward the ultimate institution of a personal income tax in Wyoming. Wyoming is currently one of seven that does not impose a personal income tax. If Wyoming lawmakers enact the proposed corporate income tax during the 2020 session, “it will be followed by a personal income tax,” Larson warns.
“Some people continue to deny that the corporate-income tax bill cannot create an income tax; they are wrong, plain and simple,” Lars0n writes. “The taxpayer is defined in the corporate-tax bill by his tax filing status. All the legislature has to do is add the 1040 IRS filing status to the bill, and the personal income tax is in place. This can be done by a simple majority vote in, say, the 2021 general session; at that time Governor Gordon can sign it on the same pretext that he has now opened the door for the corporate income tax itself.”
Opponents of the proposed corporate income tax in Wyoming include Americans for Tax Reform, the Wyoming Retail Association, and the Wyoming Lodging & Restaurant Association. Were Wyoming lawmakers to enact a corporate tax, the state would be moving in the opposite direction of competing states like North Carolina, Florida, Texas, New Mexico, Missouri, Indiana, and New Hampshire, where corporate and business tax rates have been cut in recent years.
North Carolina’s corporate income tax, for example, recently dropped from 3% to 2.5% on January 1st of 2019 and is now the lowest corporate income tax rate in the nation among states that assess the tax. Corporate tax rate reductions take effect on New Year’s Day 2020 in Florida, Missouri, and New Jersey. Were Wyoming lawmakers to impose a corporate tax, their state would lose a significant advantage when competing with the likes of North Carolina, Florida, and other states that are taking action to reduce reliance on corporate taxation and other taxes on employers.
It’s not only states that are cutting corporate taxes. Nations across the globe are doing likewise.
“In 1980, corporate tax rates around the world averaged 40.38%, and 46.67% when weighted by GDP,” writes Elke Ansen, policy analyst at the Tax Foundation. “Since then countries have recognized the impact that high corporate tax rates have on business investment decisions so that in 2019, the average is now 24.18%, and 26.30 when weighted by GDP, for 176 separate tax jurisdictions.”
First Tax Cut Of 2020 Might Occur In The Tar Heel State
North Carolina is once again poised to be among the first states to cut taxes in the new year. The new state budget, which the North Carolina House of Representatives approved with a vote to override Governor Roy Cooper’s (D) veto back in September, includes a cut in the state franchise tax, reducing the rate by about a third and saving in-state businesses approximately $250 million annually.
That new budget and the franchise tax included within will become law if the North Carolina Senate joins the House in voting to overturn Governor Cooper’s budget veto. Republicans hold a 29 to 21 majority in the North Carolina Senate, meaning that at least one Democrat’s vote will be needed in the state senate to override the Governor’s veto, assuming all Republicans vote in favor of the override. Many in Raleigh believe that there is more than one Democrat in the senate who is willing to vote for the budget veto override. In fact, a bipartisan supermajority already voted for the budget when it was initially passed by the North Carolina Senate.
A veto override vote could occur in the North Carolina Senate as early as mid-January. Roy Cordato, vice president of research at the John Locke Foundation, a Raleigh, N.C.-based think tank, explains why this cutting the state franchise tax would be a pro-growth move for North Carolina lawmakers:
“North Carolina’s franchise tax is a punitive and opaque tax levied on businesses organized under one of the usual corporate forms, primarily C-Corps and S-Corps,” Cordato writes. “It is inconsistent with both good economics and good government. Most of the problems associated with the corporate income tax are also present in the franchise tax. But it goes a step further by taxing what tax analysts generally agree should be exempt from taxation and as a result it double taxes business assets.”
North Carolina is one of only 16 states that imposes a capital stock and franchise tax on businesses. Among the states that levy a capital stock and franchise tax, lawmakers have been taking action to eliminate it. State franchise taxes in New York and Mississippi are in the process of being phased out. Capital stock and franchise taxes phaseouts were recently completed in Pennsylvania, Virginia, and Rhode Island.
“Ideally, North Carolina should follow the lead of most other states and abolish the tax,” Cordato writes.
Should North Carolina senators enact this franchise tax cut in January by overriding Governor Cooper’s budget veto, it will provide another example of how state lawmakers across the country, even those whose state already has a relatively competitive business tax climate, are not resting on their laurels and are continuing to pass reforms that make their states more conducive to economic growth and job creation. Enactment of this franchise tax cut would bookend an accolade-filled year for North Carolina with more tax relief.
In July CNBC ranked North Carolina as home to the nation’s best economy. This month it was announced that North Carolina took the top spot in the Forbes Best States For Business 2019 list, the third time that North Carolina has held the top spot in that ranking. North Carolina lawmakers point to the fiscal and regulatory reforms of the past decade as the fuel for this reform.
When this past decade began, North Carolina’s corporate income tax rate, at 6.9% back in 2009, was more than double today’s rate of 2.5%. A decade ago North Carolina’s top personal income tax rate was 7.75%, more than 46% higher than today’s 5.25% flat income tax rate.
“North Carolina’s economy is booming,” North Carolina Senate President Phil Berger (R-Rockingham) said. “Conservative Republican policies lowered taxes, created jobs, and stabilized a budget that was in freefall when we took over in 2011, all while investing record amounts in public education. That’s why people are moving to this state in droves.”
North Carolina isn’t the only state where business tax relief relief will be enacted in 2020. A corporate tax cut recently passed in Utah will take effect in mid-February, which is around the time when a corporate tax hike could be hitting the desk of Governor Mark Gordon in neighboring Wyoming. Tennessee Governor Bill Lee (R) signed two tax cuts during his first year in office and has made clear that cutting the state’s corporate tax is a priority for him. South Carolina’s Governor has also indicated an interest in income tax rate-reducing tax reform.
While the institution of a corporate tax in Wyoming would be significant, it would serve to make the Cowboy State an outlier. Expect more states and nations to continue taking corporate and business tax rates in the same downward direction as North Carolina, Florida, Utah, Missouri, and many other states and countries.
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