Sunday, May 15, 2011

Business tax cuts undercut the economy; what other measures make sense?

I read this editorial by Edwin McLenaghan in the Triangle Business News.
I thought it made a lot of sense, and worth repeating.
McLenaghan is a public policy analyst at the N.C. Budget & Tax Center in Raleigh.

"Policymakers from both political parties have proposed cutting or eliminating North Carolina’s corporate income-tax rate in hopes it will boost business investment and job creation. 
While cutting corporate taxes might make for a good political sound bite, evidence shows the state would be better off with other alternatives for boosting the economy.

North Carolina already has the lowest state and local business taxes as a share of the economy in the country, and the corporate income tax accounts for less than $1 in $13 paid by N.C. businesses in state and local taxes. In fact, a 30 percent cut in the rate (as proposed by Gov. Perdue) would result in just a 2.2 percent reduction in business taxes and only a 0.04 percent reduction in total business costs.

The fiscal research division of the General Assembly estimates the recent proposal to cut the state rate to 4.75 percent from 6.9 percent would cost the state $307 million in fiscal 2012, with the annual cost rising to $410 million after five years.

Analysts in other states have modeled the impact of corporate tax cuts, and the results strongly suggest new jobs would come at a high cost. In Oregon and California, legislative analysts predict cutting the state corporate income tax rate by 20 percent to 30 percent would increase personal income by 0.2 percent and employment by 0.06 percent to 0.1 percent after five years. This translates into an estimated cost of $98,000 per job in Oregon and $83,000 in California. And because nearly all states have a balanced-budget requirement, their residents would pay the entire cost through higher personal taxes or cuts to public services.
Proponents argue tax cuts will increase corporate profits and encourage investment. But profits are at record highs, and corporations aren’t hiring widely. Cutting the corporate rate will simply boost profits with no promise or evidence of job creation. In fact, much of the after-tax savings from a tax cut will flow straight to out-of-state investors and executives.
The other main beneficiary of proposed corporate tax cuts would be the federal government. Because profitable corporations deduct state income-tax payments on federal returns, 35 cents of every dollar in cuts would go to the U.S. Treasury.

Small-and mid-sized businesses are the engine of job growth, but few would benefit from reducing the rate. In 2005, only about 28,000 of North Carolina’s roughly 775,000 businesses paid income tax. In the same year, 217 corporations accounted for nearly three of five dollars in those payments. That means 60 percent of any corporate tax cut would flow to 0.12 percent of North Carolina’s private employers.

Because of loopholes and subsidies, the state’s biggest corporations typically pay less than the statutory 6.9 percent rate. Of the 14 Fortune 500 companies headquartered in North Carolina, none likely paid the statutory rate in 2010, and only three paid more than 5 percent. Three companies – Nucor Corp., Progress Energy Inc. and Goodrich Corp. – received net state corporate income-tax subsidies despite substantial profits.

All businesses and residents benefit from having a solid work force, sound infrastructure and public investments in the quality of life. Research by economist Timothy Bartik suggests specific public investments that will do far more to build a state’s economy than corporate tax cuts. Here are four items N.C. could pursue:

Customized job training: Expand job‐training grants to individual firms, leveraging the resources of the community college system. Bartik’s research shows customized job training programs are 10 to 16 times as cost-effective in creating jobs as business-tax incentives.

Manufacturing extension services: Expand consulting services to small- and mid-sized manufacturers to help them compete, leveraging funding through the Manufacturing Extension Partnership program of the U.S. Department of Commerce. Such efforts are about nine times more cost-effective than tax incentives in creating jobs.

• Subsidized employment and economic development: Temporarily subsidize part of the wages for new jobs filled by workers who endured long-term unemployment, with preferences for small- and mid-sized businesses.

High-quality, early childhood education: Expand North Carolina’s early childhood programs, Smart Start and More At Four, and eliminate the waiting list for child-care subsidies. Bartik recently estimated the present value of a dollar of state investment in Smart Start and More At Four was $8.79.

I give the Triangle Business Journal alot of credit for publishing this!