On tax reform, NC is at risk of being passed by other states

North Carolina has been a national leader in tax reform over the past 15 years, but we risk being passed up if we don’t keep moving forward.

State tax reform has been all the rage recently, especially among other Southern states.

Just last month, a newly created Georgia Senate Appropriations study committee crafted a plan to phase out Georgia’s personal income tax completely by 2032. Their current lieutenant governor is expressing his interest in eliminating the tax as part of his gubernatorial campaign.

South Carolina’s Senate passed a bill earlier this month to place the state on a path that would first lower, then eliminate its personal income tax.

Louisiana eliminated its franchise tax effective this year, lowered its corporate income tax, and reduced its personal income tax to a flat 3% rate while significantly increasing its standard deduction.

Last year Mississippi Gov. Tate Reeves signed legislation to phase out his state’s personal income tax completely, while also lowering Mississippi’s sales tax on groceries.

Meanwhile, six other states reduced their personal income tax rates effective this year, including Kentucky and Oklahoma.

Finally, Florida legislators are now openly discussing eliminating the non-school portion of their local property taxes.

Low-tax states are a magnet for people, with research showing states with lower tax burdens rank highly in in-migration, while states losing population tend to be those with higher tax rates. That welcoming environment also translates into growing investment and job creation.

State governors and legislatures have taken notice, resulting in the highly competitive tax-cutting environment mentioned above.

While still ranking as MSNBC’s top state for business, and holding the 13^th best slot in the Tax Foundation’s State Tax Competitiveness Index, North Carolina risks falling behind other states if it stands still.

The North Carolina legislature’s failure to come to a budget agreement for the budget year that started July 1 of 2025 is largely fueled by the House and Senate’s disagreement on how to treat already-scheduled personal income tax rate reductions.

While the Senate wants to guarantee the already scheduled rate reductions while possibly adding another cut, the House instead wants to increase significantly the revenue triggers required for rate cuts to take effect, which would seriously jeopardize any reductions.

Given the aggressive tax-cutting nature of our regional neighbors, North Carolina cannot afford to halt the decade and a half’s worth of momentum we’ve built on tax reform.

Indeed, in addition to the already scheduled personal income tax rate reductions, North Carolina legislators should consider a few more tax reform proposals.

1. Repealing the onerous and destructive franchise tax would be a great next step.

The franchise tax is a tax on a business’s net worth. Making matters worse, businesses must pay the tax every year, even in those in which they lose money, punishing job creators when they can least afford it.

With Louisiana’s repeal, North Carolina remains one of just 14 states with such a tax.

2.North Carolina should index its standard deduction to inflation. While state legislators have significantly increased this deduction over the past dozen years, increasing the deduction along with inflation should be the minimum action in years the deduction isn’t raised legislatively.

An unchanging deduction can result in low-income workers being pushed into the taxable bracket even if their incomes are just keeping up with the pace of inflation (or worse, isn’t). In short, these workers may be no better off financially as inflation eats away at any income gains, but they nevertheless will begin owing taxes.

3. North Carolina should eliminate taxes on capital gains. Unlike the federal government, North Carolina taxes capital gains at the same rate as ordinary income.

Taxing capital gains is a double taxation of sorts: people are taxed when they earn income, make investments with that after-tax income, then are taxed again on any gains from that investment.

Eliminating the tax on capital gains would eliminate the bias against saving, investment, and entrepreneurship that still exists in North Carolina’s tax code. Savings and investment are the key ingredients to a growing economy, and growth is necessary for new jobs and higher wages.

Standing still — or slowing down — on tax reform puts North Carolina at risk of being passed by regional neighbors who are significantly picking up the pace. In terms of competitiveness, now is not the time to stay put if we want to remain at the head of the pack.

“On tax reform, NC is at risk of being passed by other states” was originally published on www.carolinajournal.com.