Tax Change for Multistate Corporations – A Measure that Would Harm Critical State Investments and Fail to Help Economy

A proposed change in the way North Carolina taxes multistate corporations would not achieve its goal of boosting investment and job creation in the state, but instead result in additional revenue losses that would further threaten critical investments in education, roads, and other services that are the foundation of future economic growth.

The change being considered by state lawmakers would provide a tax cut to only certain corporations and with no guarantee of job creation. It would reduce revenue available for public investments by $90 million in the fiscal year that starts July 1, 2014. This loss would come on top of the nearly $440 million in lost revenue over that year resulting from the tax plan passed last year and likely result in further cuts to public schools, health care, and other important investments that also contribute to the success and viability of corporations.

Corporations doing business in North Carolina pay state income tax on the portion of their nationwide profits that they earn in the state. To determine that portion, the state uses a formula based on three things: a corporation’s property, payroll and sales in North Carolina – with sales factored in more heavily. State lawmakers are considering a shift to a formula that would consider only the sales component. Under this formula, known as single sales factor (SSF), a multistate corporation making 10 percent of its sales to North Carolina customers would pay North Carolina corporate income tax on 10 percent of its nationwide profit.

Proponents of SSF claim that such a change will improve the state’s business climate by making expansion of property and payroll in the state more attractive to businesses. Other states that have adopted an SSF formula based on this premise have not seen this happen, however, and there is no reason to believe that North Carolina will experience a different outcome.

State lawmakers should reject a single sales factor formula and instead focus on creating a fairer corporate income tax by closing existing loopholes that gives preferential treatment to some businesses at the expense of others.