Tax Reform Takes the Spotlight: What You Need to Know Now!
As we turn the page on a contentious election season, the stage is set for some serious discussions about taxes in 2025—both in Washington and right here in Raleigh. With a Republican Congress and a familiar Trump administration on the horizon, we can expect to see efforts to extend the tax cuts that were put in place back in 2017. This could mean continued reductions in tax rates and favorable corporate tax treatments that allow businesses to invest more freely.
On the flip side, North Carolina’s GOP-controlled legislature will have to navigate a new reality with Democratic Governor Josh Stein at the helm—a governor whose fiscal vision doesn’t align with theirs. This sets the stage for a fascinating showdown over our state’s financial future.
Let’s take a closer look at our state’s tax landscape. Over the last dozen years, North Carolina has seen substantial tax reforms that have significantly lowered both personal and corporate income tax rates. The result? More households are exempt from income tax, and while we’ve broadened the base of the sales tax, we’ve also managed to reduce its rate. This has led to a tax structure that resembles the much-praised Flat Tax model advocated by supply-side economists for decades.
Of course, not everyone is on board with these changes. Critics argue that these reforms have starved state services and disproportionately affected low-income families. But the facts tell a different story. North Carolina has taken a methodical approach to tax reform, ensuring that changes are phased in gradually and that revenue meets essential benchmarks before rates are slashed. Importantly, our state spending keeps pace with inflation and population growth, demonstrating that we’re committed to funding the services our citizens rely on.
Moreover, when assessing tax burdens, it’s crucial to consider not just state and local taxes but also the significant federal taxes that fund more than a third of our state budget. Every taxpayer in North Carolina is also contributing to federal taxes, making it nonsensical to examine our situation in isolation. The Institute on Taxation and Economic Policy shows that the U.S. maintains a progressive tax system, with the lowest-income earners paying about 17% of their income in combined federal, state, and local taxes, while those at the top pay 29%.
Given the current state revenue projections, it’s unlikely we’ll see major tax overhauls in 2025. However, the topic will certainly be on the table. In previous sessions, the legislature approved a gradual phaseout of North Carolina’s corporate income tax, and you can bet that some groups will push to put that on hold to revamp the franchise tax or other levies instead.
I’m here to say: Let’s not hit the brakes. Taxing corporate income twice—once at the corporate level and again as dividends or capital gains—is an outdated and harmful practice. It distorts investment decisions and stifles economic growth. The history of the corporate tax is rooted in frustration over personal income tax regulations. Originally, it was designed as a workaround for taxing the wealthy shareholders who dominated corporate ownership. Unfortunately, that workaround never went away when the personal income tax was permitted under the 16th Amendment, and we’ve been living with its adverse effects ever since.
North Carolina is making strides, ranking 12th in the nation in tax competitiveness according to a recent study by the Tax Foundation. So, what’s the best move to catapult us into the top 10? Completing the phaseout of the corporate tax. Tax Foundation economists suggest that doing so could elevate us to an impressive 5th place in tax competitiveness.
As discussions about extending the corporate tax reforms from 2017 unfold in Congress and beyond, let’s ensure we don’t lose sight of North Carolina’s pioneering tax policies. It’s time to finish what we started and pave the way for a brighter, more prosperous future for all our residents.
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