After being ranked ninth in the 2024 rankings and 12th in the 2025 rankings, North Carolina has slipped to 13th in the 2026 State Tax Competitiveness Index by the Tax Foundation. While this reverses earlier progress in the ranking, North Carolina was still among the top 50% of states across all five subindices evaluated in the index.
The yearly ranking evaluates the tax structures of all 50 states and DC and ranks them according to their relative competitiveness. Additionally, states are ranked in five narrower categories: corporate tax, individual income tax, sales tax, property tax, and unemployment insurance tax.
In addition to its high overall rank, North Carolina performed well across the five major tax categories assessed by the index. North Carolina placed third in corporate taxes, 22nd in individual income tax, 15th in sales tax, 21st in property tax, and 7th in unemployment insurance tax.
The index credits North Carolina’s high performance to its low income tax rates — with a flat 4.25% personal income tax rate and a corporate income tax of just 2.25%, set to progressively decline to 0% by 2030 — and “relatively competitive property and sales tax systems.” It goes on to attribute the state’s ability to maintain these low rates to its “decision to forgo many nonneutral and distortive business tax credits,” and to “its commitment… to broad bases and low rates.”
Despite North Carolina’s high ranks across the board, the index maintains that there is still room for the state to improve, specifically in regard to business net operating losses (NOL). North Carolina maintains a low bonus depreciation allowance of 15%, “substantially lower than the federal allowance,” and restricts NOL carryforwards to just 15 years. Furthermore, the state levies an “unusually aggressive” franchise tax on the value of companies instead of their profits, which the ranking cites as the largest impediment on North Carolina’s tax competitiveness. This “yield[s] a tax levied without regard to ability to pay,” and, in combination with the North Carolina’s other problematic NOL policies, disincentivizes investment in the state.
The index recommends North Carolina take steps to “rectify [its] adverse treatment of investment.” Specifically, it advises adopting permanent full expensing and raising its Section 179 expensing limit from $25,000 to come more in line with the federal allowance. Additionally, as the single “largest barrier to the state’s tax competitiveness,” the index encourages reforms to North Carolina’s franchise tax.
Although North Carolina did not break into the top 10, this year’s index nevertheless holds North Carolina in high praise. Out of the states levying all major taxes, North Carolina ranked among the highest performers, with only five others ranking above it. Additionally, of the top 10 states, seven forgo one or more major taxes, such as individual or corporate income taxes, which they compensate for by leaning harder into other taxes or relying on natural resources, among other solutions. This results in tax structures that many states cannot replicate. The North Carolina model, by contrast, is cited in the index as one that other states can and should follow.
The index’s authors note in their forward that taxes, while not the only factor involved in a strong economy, “are an important part of the mix” when positioning a state for economic growth and that “Every state can benefit from a simple, neutral, transparent, pro-growth tax structure.”
You can read the 2026 State Tax Competitiveness Index and view the full rankings here.
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