North Carolina’s legislature has decided to undertake a review of the state’s tax system, including whether to allow the continuation of a film tax credit that was first put in place in 2010.
Tax policy is one way in which the states compete. Ideally, states would compete on the basis of overall low tax rates; however, in practice that has never been the case. Tax credits, which essentially mitigate the harm of high tax rates, are thus the most common tools states use to compete with each other in tax policy.
Many tax reformers advocate against tax credits, arguing that the real solution is to rewrite the tax code so that oppressive levels of corporate taxation are lowered for all rather than the legislature carving out special areas of favored treatment. In principle, they’re right. But even in North Carolina, where two advancing tax plans, to their credit, propose making flatter the individual income tax while at the same time lowering the corporate tax rate, neither plan proposes to extinguish all tax credits.
North Carolina was ranked the 44th highest corporate tax jurisdiction in the nation according to the Tax Foundation, and its high taxes were evidently a disincentive to the film industry until the tax credits mitigated their impact. Even with a reformed tax system, if the rates are not effectively lowered for the film industry to the level that they are with the credit, the film industry may decrease its investment in the state. Other states, such as Louisiana and Georgia, currently have, and will maintain, lower effective rates for the industry even if North Carolina implements broad tax reform. This is tax competition at work.
And competition seems to be working for North Carolina:
- $376 million in film industry spending flooded the state’s economy in 2012, up from $70 million before the tax credit
- For every $1 in film tax credit, film productions spent $10 in the state.
- Permanent and part time jobs were created, in addition to increased business for many existing merchants
A broader base, flatter rate system, and a system that treats all industry alike should be the goal of all tax policy; however, that goal can sometimes obscure the real world implications of getting from here to there. If North Carolina wants to keep its growing film industry, even under the proposed tax reform plans, the film credit will have to stay in place.