What are business tax cuts good for?

Posted: 8 July 2013 in Uncategorized
Tags: , , ,

bustaxshrinking

Just like war, absolutely nothing!

In West Virginia [ht: db], as in the nation as a whole, business taxes make up a smaller and smaller percentage of total tax revenues. As the chart above shows, business tax revenue was lower in 2013 than it was fourteen years earlier in 1999. While corporate net income and business franchise taxes made up 12.7 percent of the general revenue fund in 1990, today they only account for 5.7 percent. This trend is expected to continue in the years ahead as the business franchise tax is eliminated and the corporate net income tax rate drops to 6.5 percent by 2016.

And, as it turns out, these business tax cuts simply will not lead to more investment and jobs. As the West Virginia Center on Budget and Policy explains,

The larger reason for why these business tax cuts will do little to boost investment or jobs is that they are a small cost of doing business compared to other interstate differences, such as labor, energy, transportation, occupancy, and other costs of production.

For example, according to the IRS Corporate Source Book, total business expenses in the U.S were about $25 trillion in 2010. Of this amount, businesses deducted about $493 billion in federal, state, and local taxes. This amounts to just two percent of total business expenses in 2010. Using a slightly higher figure of $619 billion provided by the Council on State Taxation (COST), state and local taxes paid by businesses equated to about 2.5 percent of business expenses in 2010. . .

Since cutting these two corporate taxes only reduces business costs by a very tiny amount, it is clear that business location and investment decisions hinge on factors other than taxes and that cutting business taxes are an inefficient way to boost economic growth and job creation. This is especially true when you look at who likely benefits from corporate tax cuts and what sacrifices have to be made in order to balance the budget with less revenue.

For example, most scholars maintain that corporate taxes largely fall on capital or shareholders and that the benefits of corporate tax reductions mostly go to high-income taxpayers and those living out of the state. Since most large businesses in the state that pay the lion’s share of corporate net income and business franchise taxes are headquartered out-of-state and whose shareholders live mostly out-of-state, this means most of the tax savings – $82.3 million in 2013 – flows outside of the state’s borders. Meanwhile, when the state has to cut higher education funding and raise tuition for in-state students because of these tax cuts the result is a tax increase on the state’s college students and parents.

While it is very important for our state to be a place where businesses can thrive and prosper, slightly reducing business costs is not going to make this happen. By investing in the important public structures that provide a foundation for economic growth and a better quality of life, we are much more likely to get a better bang for our buck and make the state a better place to live, work, and raise a family.

Now, as I’ve argued before, corporations will lobby for anything they can get (including lower tax rates) but, in the end, that’s not the main reason they choose to expand or relocate activities—between either states or countries. The goal, as always, is higher profits.

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