Raleigh

You'll sometimes hear from business interests that North Carolina's corporate income tax rate isn't competitive with our neighbors.

The corporate rate is 6.9 percent, among the highest in the Southeast.

A lot of companies, though, don't pay anywhere near 6.9 percent. For some firms organized as corporations, the effective tax rate is somewhere between 2 and 3 percent of earnings.

Some of that is by design. North Carolina has specific tax breaks for banks designed to make the banking industry here highly competitive. As federal barriers to banking growth and mergers fell, the tax breaks had their intended effect. The state's banking industry is among the strongest in the country.

Other wide-ranging tax breaks designed to encourage business growth also lower the effective corporate tax rate.

But the other reason that firms pay less than the 6.9 percentage rate is that they employ creative accountants, whose job it is to dream up loopholes never envisioned by the people who crafted the tax law.

And so, companies do things like form holding companies in states such as Delaware that have no state income tax. Then they figure out ways to charge off income to those holding companies, hiding earnings made in this state.

Most recently, Walmart got nabbed for trying to shift income by using some creative accounting. It did so essentially by paying to a holding company, really itself, and then deducting the rent from its earnings in North Carolina.

The courts ruled that Walmart owed the state $33 million, and based on that ruling, some other companies using similar schemes paid up without being sued.

But Walmart wasn't the first. A similar case about a decade ago involved mall retailer The Limited Inc. Before that, Toys "R" Us made headlines by making trademark payments to a holding company.

You see, imaginative accounting never goes out of style. One of the tax proposals in the state House budget plan would make it a lot more difficult, though.

Combined reporting, now used in 21 states, is designed to limit tax dodges and income shifting. It would require multi-state corporations to figure their state corporate tax looking at profits throughout the country and then examine them as a ratio of the business activity within North Carolina.

Business interests have been lining up to oppose the measure, and will no doubt argue that making the change during a recession is especially harmful.

But just who do these groups represent?

Most businesses in North Carolina aren't organized as corporations and don't pay corporate tax. According to the state Department of Revenue, 64 percent of those companies that are organized as corporations would be unaffected by the change.

And when big global retailers don't pay their fair share of taxes, who picks up that share? It's the payers of the personal income tax -- individuals, and small and medium-sized businesses.

Soon we'll see on whose side all legislators stand.

Scott Mooneyham writes for Capitol Press Association. Contact him at smooneyh@ncinsider.com