2017 International Tax Competitiveness Index

Tax Policy – 2017 International Tax Competitiveness Index

The structure of a country’s tax code is an important determinant of its economic performance. A well-structured tax code is easy for taxpayers to comply with and can promote economic development, while raising sufficient revenue for a government’s priorities. In contrast, poorly structured tax systems can be costly, distort economic decision-making, and harm domestic economies.

Many countries have recognized this and have reformed their tax codes. Over the past few decades, marginal tax rates on corporate and individual income have declined significantly across the Organisation for Economic Co-operation and Development (OECD). Now, most nations raise a significant amount of revenue from broad-based taxes such as payroll taxes and value-added taxes (VAT).

New Zealand is a good example of a country that has reformed its tax system. In a 2010 presentation, the chief economist of the New Zealand Treasury stated, “Global trends in corporate and personal taxes are making New Zealand’s system less internationally competitive.”[1] In response to these global trends, New Zealand cut its top marginal individual income tax rate from 38 percent to 33 percent, shifted to a greater reliance on the goods and services tax, and cut its corporate tax rate to 28 percent from 30 percent. New Zealand added these changes to a tax system that already had multiple competitive features, including no inheritance tax, no general capital gains tax, and no payroll taxes.

Some nations, however, have not kept up with the global trend. The United States, for example, has not reduced its federal corporate income tax rate from 35 percent since the early 1990s. As a result, its combined federal, state, and local corporate tax rate of about 39 percent is significantly higher than the average rate of 25 percent among OECD nations.[2] In addition, as most OECD nations have moved to a territorial tax system, the United States has continued to tax the worldwide profits of its domestic corporations.

Other nations have moved further from well-structured tax policy. Over the last few decades, France has introduced a number of reforms that have significantly increased marginal tax rates on work, saving, and investment. For example, France recently instituted a corporate income surtax, which joined other distortive taxes such as the financial transactions tax, a net wealth tax, and an inheritance tax.

The International Tax Competitiveness Index

The International Tax Competitiveness Index (ITCI) seeks to measure the extent to which a country’s tax system adheres to two important aspects of tax policy: competitiveness and neutrality.

A competitive tax code is one that keeps marginal tax rates low. In today’s globalized world, capital is highly mobile. Businesses can choose to invest in any number of countries throughout the world to find the highest rate of return. This means that businesses will look for countries with lower tax rates on investment to maximize their after-tax rate of return. If a country’s tax rate is too high, it will drive investment elsewhere, leading to slower economic growth. In addition, high marginal tax rates can lead to tax avoidance.

A neutral tax code is simply one that seeks to raise the most revenue with the fewest economic distortions. This means that it doesn’t favor consumption over saving, as happens with investment taxes and wealth taxes. This also means few or no targeted tax breaks for specific activities carried out by businesses or individuals.

A tax code that is competitive and neutral promotes sustainable economic growth and investment while raising sufficient revenue for government priorities.

There are many factors unrelated to taxes which affect a country’s economic performance. Nevertheless, taxes play an important role in the health of a country’s economy.

To measure whether a country’s tax system is neutral and competitive, the ITCI looks at more than 40 tax policy variables. These variables measure not only the level of taxes, but also how taxes are structured. The Index looks at a country’s corporate taxes, individual income taxes, consumption taxes, property taxes, and the treatment of profits earned overseas. The ITCI gives a comprehensive overview of how developed countries’ tax codes compare, explains why certain tax codes stand out as good or bad models for reform, and provides important insight into how to think about tax policy.

2017 Rankings

Table 1. 2017 International Tax Competitiveness Index Rankings
Country Overall Rank Overall Score Corporate Tax Rank Consumption Taxes Rank Property Taxes Rank Individual Taxes Rank International Tax Rules Rank
Estonia 1 100.0 1 10 1 7 7
New Zealand 2 88.7 18 7 3 1 15
Switzerland 3 85.2 7 1 33 4 9
Latvia 4 85.0 2 27 7 6 5
Luxembourg 5 82.7 26 5 18 13 2
Sweden     6 81.8 6 11 6 22 8
Australia 7 78.9 25 6 5 11 17
Netherlands 8 77.5 19 14 24 14 1
Czech Republic 9 74.3 8 32 10 3 10
Slovak Republic 10 74.1 10 31 2 5 27
Turkey 11 73.7 15 25 17 2 11
Korea 12 71.8 20 3 27 8 31
Austria 13 71.3 16 12 9 33 6
United Kingdom 14 70.8 17 17 31 18 3
Norway 15 70.7 14 23 16 10 14
Ireland 16 70.4 4 24 12 23 20
Canada 17 69.1 21 8 23 17 22
Slovenia 18 68.2 9 26 15 16 16
Finland 19 68.2 5 16 19 28 21
Hungary 20 67.0 3 35 26 24 4
Denmark 21 67.0 13 21 8 30 23
Japan 22 66.8 34 2 28 26 25
Germany 23 66.6 23 13 13 32 12
Iceland  24 63.5 12 22 22 31 19
Mexico 25 62.2 31 19 4 9 35
Israel 26 61.5 29 9 11 27 32
Belgium 27 60.3 30 33 25 12 13
Spain 28 59.8 27 15 32 21 18
Greece 29 57.2 24 28 21 15 30
United States 30 55.1 35 4 29 25 33
Poland 31 54.4 11 34 30 20 29
Chile 32 53.1 22 29 14 19 34
Portugal 33 51.9 32 30 20 29 28
Italy 34 47.7 28 20 34 34 26
France 35 43.4 33 18 35 35 24

For the fourth year in a row, Estonia has the best tax code in the OECD. Its top score is driven by four positive features of its tax code. First, it has a 20 percent tax rate on corporate income that is only applied to distributed profits. Second, it has a flat 20 percent tax on individual income that does not apply to personal dividend income. Third, its property tax applies only to the value of land, rather than to the value of real property or capital. Finally, it has a territorial tax system that exempts 100 percent of foreign profits earned by domestic corporations from domestic taxation, with few restrictions.

Measuring Marginal Tax Rate on Capital Assets

Tax Policy – Measuring Marginal Tax Rate on Capital Assets

Key Findings:

  • The United States has the highest statutory corporate tax rate in the industrialized world at 35 percent (39.1 percent when including the average state corporate tax rate). However, our research concludes that each new $1 in corporate investment is actually taxed at a rate of 53.6 percent.
  • This report estimates the marginal effective tax rate (METR) for eight different types of business investment. This includes additional taxes–such as property taxes and state and local business income taxes–that businesses must account for when they decide if a new plant or piece of equipment will be profitable. It also includes taxes paid by shareholders while subtracting for depreciation allowances and pertinent tax credits.
  • While federal taxes weigh significantly on the cost of capital, state and local taxes—especially property taxes—comprise roughly one-third of the total tax on new capital investment, according to the report.
  • Under this methodology, the proposed 20 percent corporate rate under consideration in tax reform negotiations would lower the METR on corporate investment to 45.9 percent, a 14.3 percentage point decrease.

The literature on measuring the impact of tax policy on altering new business investment behavior is based on the concept of user cost of capital raised by Jorgenson (1963) and Hall and Jorgenson (1967). Changes in taxation, including but not limited to changes in the statutory corporate tax and personal income tax, would change the user cost of capital and change the impact of tax on marginal investment decisions. Marginal effective tax rates are commonly used to measure this impact.  This study will show how Tax Foundation’s Taxes and Growth (TAG) model measures marginal tax rates on different capital investment.

The Measurement of Service Price

The service price of capital is also sometimes referred to as the user cost of capital.  It is the cost for employing or obtaining one unit of capital asset over a defined period of time. The user costs of capital is the minimum rate of return that an investment must accomplish to cover all kinds of taxes, economic depreciation (loss of value over time due to wear and tear or obsolescence), and the opportunity cost or minimum required rate of return (Jorgenson, 1963). (“Service price” usually includes all costs, including economic depreciation. The term “user cost of capital” usually includes all costs other than economic depreciation.)

Corporate and noncorporate businesses, the two main business sectors specified in the TAG model, have different equations for service price since the tax regimes vary by sector.[1]

To illustrate how the service price is calculated in the TAG model, we begin with a cash flow statement of business receipts for noncorporate capital expressed as in equation (1). The gross after-tax return for all noncorporate capital can be expressed as tax-inclusive business income subtracting all taxes. Taxes under consideration in this study include federal business (corporate or noncorporate) income taxes, the federal gift and estate tax, as well as all kinds of taxes at the state and local level, such as property taxes, business income taxes, and gift and estate taxes.

(1) 

where Snc  is the service price for noncorporate capital; K is the capital stock in the noncorporate sector;  is the real after-tax return of rate; te is the combined federal and state estate and gift tax rate; tp,nc  is the property tax on noncorporate capital assets at the state level; δ is the rate of economic depreciation; and z is the cost reduction from tax depreciation deduction allowances and investment credit (if any). That is, (1-z) is the remaining cost of the assets after tax deductions and credits.

The service price of noncorporate capital asset i can be formulated as equation (2) by dividing both sides of Equation (1) by K  

(2)

where i is an indicator for capital asset i; itc is the rate of any investment tax credit taken against all capital assets; tnc,f is the noncorporate income tax rate at the federal level; zi,f is the net present value of cost recovery for asset i at the federal level; and tncs and zi,f  are the corresponding values for the state level. The term tnc is combined business income tax rate at the federal and state level and can be expressed as .

Unlike the noncorporate sector, the corporate sector has a second layer of taxes: the shareholder tax on capital gains and dividends. Therefore, the rate of return for the corporate sector needs to be grossed up to cover the additional individual taxes.

Following the same approach for the noncorporate sector, the service price of capital for corporate asset  can be expressed as follows

(3)

 

where tic is the combined federal and state personal income tax rate on corporate income; tp,c is the property tax on corporate capital assets at the state level; tc,f is the corporate income tax rate at the federal level; zi,f is the net present value of cost recovery for asset  at the federal level; tc,s and zi,s are the corresponding values for the state level. The term tc is the combined corporate income tax rate at the federal and state level and can be expressed as tc = tc,f +tc,s(1 – tc,f ).

Weighted Average Marginal Effective Tax Rates

The weighted average marginal tax rate is a summary measure of the tax burden across all assets under the user cost of capital framework. It is the difference (tax wedge) between the real pretax and after-tax user costs observed in the real world, divided by the real pretax user cost. That is, the TAG model calculates the marginal tax rate as the difference between the real pretax user cost (= service price net of the economic depreciation rate) and the real after-tax rate of return, measured as a percent of the pretax user cost.

The Weighted average marginal effective tax rate for noncorporate capital ( ) and corporate capital ( ) can be expressed respectively as follows:

(4)

(5)

For example, if the minimum required service price to engage an investor is 20 percent, the economic depreciation is 5 percent, and the post-tax rate of return on capital is 5 percent, the marginal tax rate would be 66.7 percent. (That is: [(20 – 5) – 5]/(20 – 5) = 10/15 = .667.

Effective Tax Rates by Asset Types and Business Form

Table 1 is the calculated marginal effective tax rate across different types of capital assets. It is worth noting that corporate capital assets face higher taxes than noncorporate capital assets. On a weighted average basis, new corporate investment faces a marginal effective rate of 53.6 percent, while noncorporate capital investment faces a marginal effective rate of only 39.1 percent. The large difference can be explained by the two layers of taxation levied on the corporate returns.

  Corporate Noncorporate
Table 1. Weighted Average Marginal Effective Tax Rates, Current Law
Equipment & software 52.7% 32.8%
Nonresidential structures 53.8% 35.6%
Intellectual property 47.1% 28.2%
Residential structures 53.5% 36.0%
Inventories 56.5% 41.8%
Commercial land 56.5% 41.8%
Nonfarm land 56.5% 41.8%
Farm land 56.5% 41.8%
Weighted average 53.6% 39.1%

Based on the “Big Six” Tax Framework released by Republican leadership, the federal corporate income tax rate would be lowered from 35 to 20 percent. The TAG model shows that a 20 percent corporate tax rate would reduce the marginal effective tax rates for most capital assets by around 14 percent (see Table 2). (That is 14 percent of the tax, not 14 percentage points. For example, the weighted average corporate tax rate would fall from 53.6 percent to 45.9 percent, a 7.3 percentage point drop in the 53.6 percent tax, equal to a 14.3 percent reduction in the tax.)

  Current law corporate 20% corporate rate (% change)
Table 2.  Weighted Average Marginal Effective Tax Rates under 20% Corporate Income Tax Rate
Equipment & software 52.7% 45.2% -14.3%
Nonresidential structures 53.8% 46.1% -14.4%
Intellectual Property 47.1% 41.2% -12.4%
Residential structures 53.5% 45.9% -14.3%
Inventories 56.5% 48.0% -14.9%
Commercial land 56.5% 48.0% -14.9%
Nonfarm land 56.5% 48.0% -14.9%
Farm land 56.5% 48.0% -14.9%
Weighted average 53.6% 45.9% -14.3%

 Apart from reducing the statutory rate on corporate income, speeding cost recovery for capital investments to encourage business to invest more is another well-researched component of fundamental business tax reform. Compared to current law, full expensing of capital investment (immediate write-off instead of depreciation) would reduce the weighted average marginal effective tax rate for corporate assets by 15.5 percent, and reduce weighted average METR for capital assets in the noncorporate sector by 4.4 percent (see Table 3). 

  Corporate Noncorporate
  Current law Full expensing (% change) Current law Full expensing (% change)
Table 3.  Weighted Average Marginal Effective Tax Rates under Full Expensing
   Equipment & software 52.7% 43.3% -17.9% 32.8% 24.6% -25.1%
   Nonresidential structures 53.8% 40.3% -25.2% 35.6% 22.2% -37.7%
   Intellectual property 47.1% 45.9% -2.6% 28.2% 26.7% -5.3%
   Residential structures 53.5% 40.2% -24.9% 36.0% 22.3% -38.0%
   Inventories 56.5% 56.5% 0.0% 41.8% 41.8% 0.0%
   Commercial land 56.5% 56.5% 0.0% 41.8% 41.8% 0.0%
   Nonfarm land 56.5% 56.5% 0.0% 41.8% 41.8% 0.0%
   Farm land 56.5% 56.5% 0.0% 41.8% 41.8% 0.0%
Weighted average 53.6% 45.3% -15.5% 35.8% 34.2% -4.4%

 The marginal tax results are impacted by different business tax provisions, both at the federal level and at the state and local level. To focus on the role of federal tax policies only, we recalculate these METRs by zeroing out all state and local taxes impacting service prices while fixing the rate of return for capital investments.

Table 4 shows the METRs due to federal taxes only. On a weighted average basis, the numbers are 36.1 and 26.8 percent for corporate and noncorporate respectively, or around 30 percent lower than the combined federal, state, and local baseline level, which indicates that ignoring state and local taxes in calculating METRs would distort the picture considerably.

  Corporate Noncorporate
  Current law No state and local taxes (% change) Current law No state and local taxes (% change)
Table 4. Weighted Average Marginal Effective Tax Rates excluding State and Local Tax Impact
Equipment & software 52.7% 33.1% -37.2% 32.8% 15.8% -52.0%
Nonresidential structures 53.8% 38.3% -28.9% 35.6% 22.7% -36.4%
Intellectual property 47.1% 16.0% -66.1% 28.2% 5.0% -82.1%
Residential structures 53.5% 37.8% -29.4% 36.0% 23.1% -35.9%
Inventories 56.5% 42.4% -24.9% 41.8% 30.8% -26.4%
Commercial land 56.5% 42.4% -24.9% 41.8% 30.8% -26.4%
Nonfarm land 56.5% 42.4% -24.9% 41.8% 30.8% -26.4%
Farm land 56.5% 42.4% -24.9% 41.8% 30.8% -26.4%
Weighted Average 53.6% 36.1% -33.2% 35.8% 26.8% -32.2%

Conclusion

This study demonstrates how Tax Foundation’s TAG model calculates the weighted average METRs for different capital assets in the corporate and noncorporate sectors. The high marginal rates of up to 53 percent in the corporate sector illustrate why there is an urgent need for business tax reform.

 

[1] Data for the corporate sector in the TAG model includes both C corporations and S corporations. Due to data constraints from the Bureau of Economic Analysis, we cannot separate C corporations from their data report on corporate.


Source: Tax Policy – Measuring Marginal Tax Rate on Capital Assets

Five Implications of Retaining the Property Tax Deduction Under Federal Tax Reform

Tax Policy – Five Implications of Retaining the Property Tax Deduction Under Federal Tax Reform

As more details about the forthcoming tax reform bill emerge, one compromise appears increasingly likely: repealing the deduction for state and local income and sales taxes, but retaining the deduction for property taxes. In the past, we’ve explored the implications of the repeal of the state and local tax (SALT) deduction in full, but what would a property tax deduction look like on its own? Here are five implications of retaining the property tax deduction.

First, it would be much smaller than the current SALT deduction: the property tax deduction accounted for just over one-third (33.9 percent) of all state and local taxes deducted in 2015, the most recent year for which data are available.

Second, it strongly benefits the middle class. Whereas the SALT deduction as a whole favors high-income earners disproportionately (since the federal income tax is highly progressive), the property tax component provides a larger deduction, as a share of adjusted gross income, to middle-income earners. This makes sense, as (1) property taxes lack progressive rate structures and (2) while those with higher incomes also have larger property holdings, the value of property doesn’t scale with income. A household earning ten times the median income is unlikely to own property worth ten times the median amount.

Table 1. Full SALT Deduction and Property Tax Deduction as a Percentage of AGI, By Income
Adjusted Gross Income Full SALT Deduction Property Tax Deduction
Source: IRS Statistics of Income (2015); Tax Foundation calculations
$0 – $24,999 2.1% 1.6%
$25,000 – $49,999 2.1% 1.3%
$50,000 – $99,999 4.0% 2.0%
$100,000 – $499,999 6.7% 2.6%
$500,000 + 7.1% 1.1%

As a percentage of AGI, households with incomes between $25,000 and $50,000 claim only 29 percent of what households with incomes above $500,000 claim on the SALT deduction as a whole (2.1 vs. 7.1 percent of AGI), but their property tax deduction actually represents a 20 percent larger share of AGI (1.3 vs. 1.1 percent of AGI). The deduction as a share of income is most generous to middle-income families, unlike the full SALT deduction.

Third, it does not penalize low-tax states the same way that the full SALT deduction does. Under the current system, itemizers can deduct property taxes as well as either income or sales taxes. Itemizers in the nine states which forgo a wage income tax would currently take the sales tax deduction, which is generally estimated on IRS worksheets rather than relying on actual receipts. This approach tends to be less generous, and of course income tax burdens are usually higher than sales tax burdens, so residents of states which forgo an income tax are generally net losers under the current regime.

The effect is most pronounced in a state like New Hampshire, which taxes neither sales nor wage income, or Alaska, which only has local option sales taxes. Still, even states which impose all of the major taxes are often net losers, as the state and local tax deduction redistributes money from lower-income filers, particularly those in low-tax states, to higher-income individuals in high-tax jurisdictions.

The property tax component on its own, though, looks rather different. Property taxes are a major source of local revenue in all states. Suddenly, a state like Texas has a deduction as a percentage of AGI that is above the median. Under the full SALT deduction, Texas’s deduction is less than half the median. A quarter of all filers (25.1 percent) take the property tax deduction, slightly less than the 29.6 percent of filers who take any portion of the SALT deduction.

Table 2. Property Tax Deductions and Other Filer Data by State
State AGI Per Filer % Claiming As % of AGI State Share
Source: IRS Statistics of Income (2015); Tax Foundation calculations
Alabama $54,457 20.9% 0.6% 0.3%
Alaska $69,181 19.9% 1.3% 0.2%
Arizona $59,031 24.9% 1.1% 1.0%
Arkansas $54,162 18.4% 0.7% 0.2%
California $77,814 27.1% 2.0% 15.1%
Colorado $72,175 28.9% 1.1% 1.1%
Connecticut $95,100 37.4% 3.0% 2.7%
Delaware $63,604 28.3% 1.2% 0.2%
Florida $63,729 18.5% 1.5% 4.9%
Georgia $59,979 26.9% 1.4% 2.0%
Hawaii $60,771 22.5% 0.8% 0.2%
Idaho $54,253 25.3% 1.2% 0.3%
Illinois $71,672 27.9% 2.6% 6.2%
Indiana $55,863 20.4% 0.8% 0.8%
Iowa $60,544 26.5% 1.6% 0.7%
Kansas $62,479 22.9% 1.3% 0.6%
Kentucky $53,742 23.0% 1.0% 0.6%
Louisiana $56,261 16.5% 0.6% 0.4%
Maine $55,070 25.7% 2.0% 0.4%
Maryland $74,992 36.4% 2.1% 2.5%
Massachusetts $87,877 32.9% 2.3% 3.7%
Michigan $58,851 24.2% 1.7% 2.5%
Minnesota $70,832 31.8% 1.6% 1.7%
Mississippi $47,412 17.6% 0.8% 0.2%
Missouri $58,426 23.3% 1.2% 1.1%
Montana $55,864 25.3% 1.3% 0.2%
Nebraska $61,498 24.4% 1.6% 0.5%
Nevada $61,066 20.1% 1.0% 0.4%
New Hampshire $71,673 29.4% 3.0% 0.8%
New Jersey $83,649 35.7% 4.1% 7.9%
New Mexico $50,883 19.4% 1.0% 0.3%
New York $81,397 24.9% 2.7% 11.2%
North Carolina $58,812 25.6% 1.3% 1.8%
North Dakota $69,081 14.8% 0.7% 0.1%
Ohio $57,774 23.1% 1.7% 2.9%
Oklahoma $58,918 20.0% 0.9% 0.5%
Oregon $62,956 32.0% 2.1% 1.3%
Pennsylvania $65,340 25.7% 2.0% 4.4%
Rhode Island $63,040 30.1% 2.6% 0.5%
South Carolina $54,870 24.2% 1.0% 0.6%
South Dakota $61,482 14.5% 0.9% 0.1%
Tennessee $56,763 17.0% 0.8% 0.8%
Texas $66,970 19.1% 1.8% 7.9%
Utah $62,716 31.8% 1.2% 0.5%
Vermont $58,290 25.5% 2.6% 0.3%
Virginia $73,957 32.4% 1.8% 2.8%
Washington $76,083 27.7% 1.7% 2.4%
West Virginia $50,786 14.8% 0.5% 0.1%
Wisconsin $61,406 28.5% 2.2% 2.0%
Wyoming $74,792 19.3% 0.7% 0.1%
District of Columbia $93,221 25.2% 1.2% 0.2%
U.S. Total $67,786 25.1% 1.8%

Fourth, some states and localities continue to benefit disproportionately from a scaled-down, property tax-only deduction, just as they do under the broader provision. The majority of the value of the property tax deduction, like the state and local tax deduction as a whole, flows to a small number of states. Just six states (California, New York, New Jersey, Texas, Illinois, and Florida) claim more than 50 percent of the property tax deduction.

In twenty-five counties, the property tax deduction is worth 4 percent of AGI or more, led by Putnam and Rockland Counties in New York, each at 5.5 percent. Of these top counties, sixteen are in New Jersey, seven are in New York, and two are in Illinois. At the other end of the spectrum are counties—generally low-income and low-population—where the deduction’s value is negligible or even non-existent. The median value of the deduction by county is 0.8 percent of AGI.

In Westchester County, New York, the property tax deduction alone is worth $5,548 per filer and $15,033 per deduction claimant. Among all counties, however, the median value per filer taking the deduction is a far more modest $2,333. The interactive county map below allows you to toggle between the property tax deduction as a percentage of AGI and the amount per filer claiming the deduction. Static versions of these maps can be found here and here.

Interactive County-Level Map

See Median Dollars Deducted
See as Percent of AGI

Fifth, retaining the property tax deduction leaves a lot of revenue on the table, as it is worth about one-third of the $1.8 trillion (or $1.7 trillion on a dynamic basis) “pay-for” the repeal of the state and local tax deduction would provide over the ten-year revenue window. Although it lacks the highly regressive features of the broader SALT deduction, and distributes benefits more broadly across states, it still represents a subsidy to taxpayers in higher-income and higher-tax jurisdictions.

The property tax, even more than other forms of state and local taxation, generally pays for highly localized public expenditures—schools, roads, police and fire protection, utilities, parks, and other local amenities—for which subsidization by less affluent jurisdictions makes little sense. On the other hand, it is sometimes argued that a large proportion of local government expenditures represent investments in human and physical capital that would be deductible as capital expenditures under an ideal tax code. To the extent that this argument has merit, it is stronger with property taxes (a chiefly local revenue measure) than income or sales taxes.

If Congress is to adopt meaningful federal tax reform, it will require significant base-broadening “pay-fors” to pay down rate reductions and structural reform. The state and local tax deduction is an important piece of the puzzle. Saving the property tax deduction makes the math somewhat more difficult, but still leaves clear paths forward. Going further and preserving the entire SALT deduction, however, might send would-be reformers back to the drawing board.


Source: Tax Policy – Five Implications of Retaining the Property Tax Deduction Under Federal Tax Reform

North Carolina Continues its Successful Tax Reforms

Tax Policy – North Carolina Continues its Successful Tax Reforms

North Carolina made headlines in 2013 when it passed its comprehensive tax reform package. By lower tax rates and broadening bases, North Carolina jumped from 44th to 12th on the State Business Tax Climate Index. The state implemented additional reforms in 2015, pushing its ranking even higher to 11th on the State Business Tax Climate Index. And the state is continuing this momentum. In the state’s recently adopted budget, the Tar Heel State plans to adopt even more tax reforms in 2019.

The budget, passed over Governor Roy Cooper’s veto, includes several large tax changes.

  • Individual Income Tax: In 2019, the individual income tax rate would decrease from 5.499 percent to 5.25 percent.
  • Standard Deduction: The standard deduction would increase in 2019. For single filers, the deduction would increase from $8,750 to $10,000, while married filers would see an increase from $17,500 to $20,000.
  • Corporate Income Tax: Also in 2019, the corporate income tax rate would fall from 3 percent to 2.5 percent.
  • Franchise Tax: Effective 2019, S corporations would face a lower franchise tax liability. S corporations would pay a flat $200 on their first $1 million in value, instead of 0.15 percent. The 0.15 percent rate would apply to any firm’s taxable value above $1 million. The franchise tax for C corporations is not impacted.

The plan also includes a few changes to the state’s child tax credit and the sales tax treatment of mill machinery.

These changes continue the long-term changes in North Carolina. The top marginal income tax rate in North Carolina was 7.75 percent. By 2019, it’ll have fallen to 5.25 percent. At the same time, the standard deduction has grown from $6,600 for married filers in 2012 to $20,000 in 2019. The corporate income tax rate will have fallen from 6.9 percent to 2.5 percent in 2019.

Unfortunately, these changes, when implemented, won’t increase North Carolina’s official score on the State Business Tax Climate Index. The state’s ranking of 11th is very difficult to improve upon, but the state should be applauded for continuing its positive, pro-growth tax changes.


Source: Tax Policy – North Carolina Continues its Successful Tax Reforms