Once The South’s Tax Capital, N.C. Now Inspires Tax Relief Elsewhere

It wasn’t long ago that North Carolina had the highest personal and corporate income tax rates in the entire southeastern United States. Prior to the 2013 tax reform act and subsequent improvements — which reduced and flattened North Carolina’s personal income tax rate while putting the corporate tax on the path to total repeal — lawmakers in other states would’ve never pointed to North Carolina as a model for competitive, pro-growth tax policy. But that’s all changed.

Not only are state lawmakers across the country now looking to North Carolina as a model for sound tax reform, even officials in no-income-tax states now point to it as motivation for providing further tax relief. Take Tennessee, one of the nation’s eight no-income-tax states, where legislators and Governor Bill Lee (R) enacted a new budget this year that provides significant tax relief to employers. It’s not lost on Tennessee lawmakers that their neighbors to the east, North Carolina, now boast the lowest corporate income tax rate in the nation and that it is scheduled to be entirely phased out by the end of 2030. As the business tax relief package that Governor Lee introduced in his State of the State address was under consideration in the Tennessee General Assembly, some Volunteer State lawmakers pointed to what is happening in North Carolina as a reason why it is imperative for Tennessee lawmakers to not rest on their laurels and to enact business tax relief this year.

While the progress already made in North Carolina helped encourage Tennessee lawmakers to reduce business tax burdens in their state, North Carolina legislators are now poised to to enact a new budget that would provide even more motivation for reform elsewhere. That’s because North Carolina legislators are now looking to eliminate the same discriminatory tax that Tennessee lawmakers have also been trying to repeal.

North Carolina and Tennessee are among the six states that levy a privilege license tax, referred to in some places as a professional privilege tax. The budget passed out of the North Carolina House of Representatives this spring, in addition to accelerating the personal income tax phasedown from 4.75% to 3.99%, also cuts the state franchise tax and repeals North Carolina’s privilege license tax.

“North Carolina’s privilege license tax, a tax levied annually on certain workers—including physicians, attorneys, engineers, architects, photographers, certain real estate professionals, and funeral directors, among others—for the ‘privilege’ of practicing these professions in North Carolina,” notes the Tax Foundation’s Katherine Loughead, “generates only a fraction of 1% of North Carolina’s general fund revenue but is burdensome to comply with, requiring taxpayers to physically mail a check or money order to the Department of Revenue with the associated paperwork, as the state does not offer a way to file and pay this tax electronically.”

With the new fiscal year arriving at the end of June, members of the North Carolina House and Senate are now working to negotiate a final budget deal. Many conservatives are urging North Carolina lawmakers to enact a final budget deal that adopts the personal income tax rate phase down to 2.49% that was in the Senate’s budget and pair that with the privilege license tax repeal that was in the House’s budget. The Tax Foundation recently wrote that repeal of North Carolina’s privilege license tax “would reduce compliance burdens and tax liability for taxpayers while also reducing administrative burdens for the state.”

The state budget enacted by Tennessee lawmakers and Governor Lee in 2019 repealed the professional privilege tax for 15 of the 22 professions that it had applied to. Tennessee legislators then repealed the professional privilege tax for physicians in 2022, leaving six professions to which the tax still applies.

The National Federation of Independent Business and other members of the business community have since been urging Governor Lee and Tennessee legislators to repeal the professional privilege tax for the remaining occupations hit by it. Repeal of North Carolina’s professional privilege tax this year, which would leave Tennessee as one of only five states to levy the tax, might inspire Volunteer State lawmakers to make 2024 the year they repeal the remainder of their professional privilege tax. Doing so would remove a tax few states levy and that many consider to be the last vestige of an income tax in Tennessee. Republicans hold legislative supermajorities in both chambers of the North Carolina General Assembly and even larger majorities in Tennessee.

“All of us collectively agree that the goal is to completely do away with this (privilege) tax,” said Representative William Lamberth (R), Tennessee House Majority Leader, after repealing the tax for physicians. “It should never have been put in to begin with and on every single profession, we’re gradually doing it the same way we do in Tennessee … very responsible and reasonable and methodical as we cut taxes down.”

“No one should be taxed just to go to work, no matter the profession,” said Jim Brown, NFIB State Director in Tennessee. “Paying the state $400 a year is a burden on many and frankly an insult to thousands of young doctors, pro-bono lawyers and in-state and out-of-state financial advisers who take care of the needs of so many Tennesseans. It’s way past time to get rid of the misnamed ‘privilege’ tax on professionals in Tennessee.”

In addition to providing an impetus for businesses tax relief in a no-income-tax state, North Carolina’s example also demonstrates how much progress can be made in a relatively short period of time, which is particularly instructive for lawmakers in states like Wisconsin, where legislators are now working to reduce a top income tax rate that is currently above 7%. The fact that lawmakers in no-income-tax states now look to North Carolina as a motivating factor in pursuing pro-growth tax reform is an indicator of how far North Carolina’s tax code has come over the past decade.