DURHAM – Incoming North Carolina Gov. Pat McCrory said Wednesday his top priorities include changing the state’s tax system, and he’s promising bankers and business leaders he’ll push back if special interests try to protect their advantage.
McCrory, who will be sworn into office on Saturday, didn’t offer a tax plan Wednesday and has committed himself only to reducing North Carolina’s highest-in-the-Southeast income tax rates to compete with South Carolina and Virginia. But he said he believes North Carolina’s corporate and personal income tax rates are holding back recovery from the Great Recession because they make the state less attractive to business executives seeking to create jobs.
North Carolina’s unemployment rate of 9.1 percent in November was the country’s fifth-highest and well above the national average of 7.7 percent.
Though business executives have sought to cut corporate and personal income taxes, McCrory said after details of his tax package are announced he expects lobbyists to work to protect the industries and executives who hire them. But the governor-elect says business leaders can expect a call from him if they seek to put their narrow interest before improvements in the state’s long-term economic strength.
“I do think tax reform is one of the solutions, but it won’t be easy. It’s going to step on everyone’s toes a little bit,” McCrory told about 1,100 people at an event hosted by the North Carolina Bankers Association and the state’s chamber of commerce. “I don’t want to step on people’s toes to cause pain. I want to step on people’s toes to get them to stand up and recognize we’ve got a problem we’ve got to fix.”
Lawmakers seeking to cut or eliminate the income tax paid by corporations should remember that while the listed rate of 6.9 percent is high compared to nearby states, tax breaks sharply cut the amount companies actually pay, said Michael Brown, an economist for Wells Fargo Securities in Charlotte.
“I think we are a lot more competitive from a tax-based standpoint than we think we are. That information is just not widely available enough for business decision-makers nationwide to look at our state and say, ‘You know what? We can do business here. It’s not as expensive as we thought,’ “ Brown said during a presentation before McCrory’s address.
North Carolina, California and Kansas are three states highly likely to adopt significant changes this year to their systems of collecting the money used to pay for government services and other spending, said Douglas Lindholm, head of the Council on State Taxation, a Washington, D.C. association of 600 large companies.
All three states are among the 23 in which the governor and both chambers of the legislature are dominated by the same political party, allowing lawmakers in those states to push through long-discussed changes, he said. But Lindholm said he expects the reality of full political control in North Carolina and the two other states to lead to gradual tax changes and not sudden ones. That’s because businesses, which plan years in advance, react badly to surprises and because the dominant political parties know they’ll get responsibility for changes that turn out badly as well as successes, he said.
“Whatever gets passed, you now own it,” Lindholm said. “They can no longer blame others for the problems that beset their state.”
McCrory, a Republican, said his biggest priorities after taking office include deciding whether the state should create its own online marketplace for health insurance policies or leave it to the federal government, whether to expand Medicaid to cover the medical costs of more poor people, and how to repay the $2.8 billion the state borrowed from Washington to keep unemployment insurance flowing.
McCrory said he would push quickly for greater drilling for natural gas both off the state’s coast and within underground shale rock formations using a controversial technology called fracking. He said he wants to reshape the state’s entire education system from pre-kindergarten to community colleges and public universities to focus on training workers that companies want to hire, and to do it with no major funding increase.
“There’s no new money that’s going to fall out of the sky,” he said.
Allan Freyer, a policy analyst with the liberal-leaning North Carolina Budget & Tax Center, said he agreed with McCrory that the state’s tax code and workforce training need updating, but doing that will be difficult. The state’s personal and corporate income taxes provide more than half of state government revenues, but companies place a lower priority on them in location decisions than factors like road and air connections and workforce quality, Freyer said.
Sharply cutting taxes “will likely lead to significant spending cuts to the investments that matter and will undermine the ability to state compete economically,” he said.