A pro-business state shouldn’t tax businesses for existing

The recent passage of the budget bill came with several important and beneficial provisions, including a bump in teacher and law enforcement pay, personal income tax cuts, and continued OSP funding. However, it did should have repealed one of the worst tax policies in the state: the franchise tax, which stifles investment, hurts small businesses, and degrades the economic climate of our great state.

Don’t let the name confuse you; this is not a tax on your local fast food franchise, or even a one-time payment to become a franchisee. No, this is an annual tax on the net worth of a business, and it is extremely harmful to both small businesses in the state and the economic growth of North Carolina more broadly.  

The Harm 

The problem with the franchise tax is simple: it punishes businesses for being in business.  

Whether they make a profit or not. 

Unlike most taxes, including the corporate income tax, which are based on an individual or corporations’ ability to pay, franchise taxes are levied on the value of a business’s net worth — including its buildings, vehicles, machinery, and other assets — and must be paid regardless of a business owner’s ability to pay. 

That is a huge problem for small businesses who do not have large legal and accounting departments designed to construct tax minimization strategies.  

I spoke to Whitney Hill, owner of Carolina Web Consultants, a small web services business based in Raleigh who was unaware that he even pays the franchise tax on a yearly basis. 

“By and large, my business is big enough that it’s not that big of a financial burden for me,” he said. “But there’s a lot of, I call them micro businesses that are incorporated, that it might be a big deal for them to pay that.” 

The fact is, for most business owners scared of non-compliance costs, accountants and bookkeepers do a substantial amount of the leg work in preparation for filing day, and the business owners just pay the bills if they can and go out of business if they cannot.  

“I don’t like having to pay like 20 different taxes,” Hill said. “You know, they hit me over here, they hit me over there.” 

A recent Tax Foundation report identified the franchise tax as North Carolina’s “single largest structural weakness.” The NC Chamber of Commerce foundation agreed with this assessment and has long called for the repeal of this tax, which they say “runs counter to modern tax principles and creates disincentives for investment.”  

The franchise tax burden is particularly troublesome in a state where small businesses are the backbone of the economy, making up 99.6% of all businesses in the state and employing nearly 2 million people.  

Punishing one of our states biggest job creators is not a successful formula for economic growth.  

Past Reform 

In 2021, the General Assembly passed SB 107, improving the state’s business climate and ratifying a plan to phase out the corporate income tax by 2030 — a huge win for all businesses in the state.  

Similarly, the legislature made changes to the franchise tax, simplifying its structure and making compliance more achievable for small business’s. 

However, phasing out the corporate income tax while leaving the franchise tax in place does not make any sense. The legislature should have advanced a plan to completely dismantle the franchise tax alongside the corporate income tax by 2030 — a move that would have significantly improved the business climate in North Carolina and brought new business and capital investment into the state.  

Donal Bryson, CEO of the John Locke foundation, made a compelling case for repeal in a January 2025 column.

Despite hopes that lawmakers would rectify this misjudgment in the most recent budget, no mention of the franchise tax was found.  

Tax Climate Score Increases Small Business 

In the recent 2026 Tax Foundation business tax climate rankings, the Tax Foundation ranked North Carolina third, citing the decreasing corporate tax rate. 

This is consistent with rankings from CNBC, which ranked North Carolina as the No. 1 state for business in the country last year and No. 2 this year.  

Data from the Federal Reserve of St. Louis correlated to the rankings from the Tax Foundation show a statistically significant correlation between new small business filings and a higher Tax Foundation score.  

For each place higher on the Tax Foundation ranking, a state receives approximately 15 more small business applications per 100,000 residents.  

North Carolina is currently ranked third, but a move from third to second could have a significant positive effect on small business ventures in the state and on the economy. 

Although we are currently a leader in the region, passivity is never competitive. While other states in the Southeast repeal harmful tax policies, North Carolina risks falling behind.  

Instead, we should make repealing the franchise tax a top priority as we continue to make this state a wonderful place to invest and do business.  

“A pro-business state shouldn’t tax businesses for existing” was originally published on www.carolinajournal.com.