Since gaining a majority of the General Assembly in 2011, North Carolina Republicans have succeeded in steadily cutting the corporate tax rate.

[Longleaf story: North Carolina’s tax cuts, explained]

Today, North Carolina’s 3% corporate tax rate is among the lowest in the United States. And the state has been richly rewarded for that — with a slew of economic development announcements and the Forbes “Best State for Business” designation two years running.

So what’s the next frontier in business tax reform? The NC franchise tax, most likely.

While this tax isn’t widely understood, it can make a huge impact especially on small to mid-size businesses. And some of North Carolina’s most powerful business groups want to put this on the General Assembly’s radar this year.

Here’s what you need to know about the NC franchise tax.

What is the NC franchise tax?

Put simply, the NC franchise tax is a fee that businesses pay each year for the “privilege of engaging in business” in North Carolina. The tax is tied to the businesses’s net worth rather than its profit.

You may have run into it yourself if you’ve ever tried to register an LLC. You know how you pay $200 each year when you file your annual report? You’re essentially paying the franchise tax.

Both active and inactive companies are required to pay the annual franchise tax. Foreign companies doing business in North Carolina must pay it as well.

What is North Carolina’s franchise tax rate?

For most companies, the NC franchise tax is $1.50 per $1,000 of net worth. Net worth is calculated as the total assets of the company minus the total liabilities.

The minimum NC franchise tax is $200, but in most cases there is no cap. For a company worth $10 million, that’s a $15,000 annual tax.

However, there are a few exceptions here. The franchise tax base of a company is technically the largest of three options: the net worth, 55% of its real estate holdings, or its “investment in tangible property” in the state.

Photo of Durham construction by James Willamor via Flickr (Creative Commons)

How has the NC franchise tax changed lately?

Until 2017, the minimum NC franchise tax was just $35. On January 1, 2017, it was raised to $200.

However, starting with the 2019 tax year, businesses will only pay a $200 franchise tax for their first $1 million in value. Before, a $1 million company would pay a $1,500 tax.

How big of an impact does the franchise tax make to NC tax revenue?

Not a big one. Corporate taxes already make up a small percentage of the state’s tax revenue. The franchise tax is likely a minority portion of that.

Via the NC OSMB

How many states have franchise taxes?

It doesn’t appear to be super common. Only about a dozen other states have corporate franchise taxes.

Kansas, Missouri, Pennsylvania and West Virginia have all repealed franchise taxes over the past decade.

What are the problems with the franchise tax?

The franchise tax inherently punishes and disincentivizes business success and investment. It’s also a regressive tax that imposes a greater burden on smaller companies than larger ones.

Is there a chance the franchise tax goes away?

Yes. The NC Chamber has made capping, reducing and ultimately getting rid of this tax one of its top priorities for 2019.

We’ll see if a bill to repeal it makes progress during the long session.

Cover image of downtown Winston-Salem by Paul Sableman via Flickr (Creative Commons)

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