Several state policymakers from both political parties have proposed cutting North Carolina’s corporate income tax rate—or even phasing out the corporate income tax altogether—in hopes that corporations will respond by investing in the state and creating much-needed jobs. The available evidence demonstrates, however, that corporate tax cuts offer only false hope on jobs. The people of North Carolina would be better off if state policymakers opted for proven investments to boost North Carolina’s economy.

Evidence from surveys of corporate CEOs, statistical analyses of state and local business taxes, and popular rankings of the “best states for business” all support the same conclusion: businesses care more about having a well-educated, highly productive workforce, access to markets and suppliers, sound infrastructure, and high quality of life for their employees than they do about taxes.

To the extent that business taxes do matter, North Carolina’s low-tax status means that policymakers should be more concerned about under-investing in the public structures that businesses rely on than about cutting corporate taxes. North Carolina already has the lowest state and local business taxes as a share of the economy in the country, but even before the most recent round of state budget cuts, North Carolina ranked 46th in per-pupil spending on public schools.

Furthermore, cutting corporate income taxes would have little benefit to the small- and medium-sized businesses that are the engine of job growth in the state. As of 2005, fewer than one in six of North Carolina’s 175,000 private employers paid any state corporate income tax, and a mere 217 corporations accounted for nearly three of every five dollars in corporate income tax payments. It’s these few corporations—representing fewer than one in 800 North Carolina private employers—that would reap more than half the benefits of any corporate tax cut.

In fact, cutting the state corporate income tax rate will simply raise corporate profits even higher with no promise or evidence that these profitable corporations will create jobs. Corporate profits are currently at record highs, and corporations are still not hiring new workers. In fact, rising dividend payouts and high executive bonuses suggest that much of the after-tax savings resulting from a corporate tax cut will flow straight to out-of-state investors and corporate managers headquartered in other states.

The General Assembly’s Fiscal Research Division estimates that a recent proposal to cut the state corporate income tax rate by one-third would cost the state $307 million in the next fiscal year, with the annual cost rising to $410 million after five years. While few North Carolina businesses would benefit from corporate tax cuts, all types of businesses and all residents benefit from having a skilled, educated workforce, sound infrastructure, and public investments that improve quality of life.

Research by respected economists Jeffrey Thompson and Timothy Bartik has demonstrated a much stronger economic return on investments in education and infrastructure than business tax incentives.  In fact, Bartik outlines specific public investments that will do far more to build a state’s economy and are much more cost-effective than corporate tax cuts:

• Expand job-training grants to individual firms through North Carolina’s nationally recognized community college system.
• Expand consulting services to small- and medium-sized manufacturers to help them become more competitive and successful.
• Temporarily subsidize part of the wages for new jobs filled by workers who have endured long-term unemployment, with preferences for jobs created by small- and medium-sized businesses.
• Expand the income eligibility requirements for and increase the number of slots available in North Carolina’s award-winning early childhood programs, Smart Start and More At Four, and eliminate the waiting list for child-care subsidies.

The people of North Carolina expect their elected representatives to be effective stewards of public resources. Each of the above options—as well as undoing many of the proposed budget cuts to education, health, and public safety—would, dollar-for-dollar, generate more economic benefits to the people of North Carolina than cutting the state’s corporate income tax rate.

Instead of joining the race to the bottom by cutting corporate taxes and the public investments those taxes make possible, state policymakers must demonstrate leadership and invest public resources in the programs most likely to pave the way to a brighter economic future for all North Carolinians.

Edwin McLenaghan is a Public Policy Analyst at the N.C. Budget and Tax Center