NCPA - National Center for Policy Analysis

Trend No. 3: Corporate Tax Reductions

June 27, 2012

Japan's corporate tax rate reduction on April 1, 2012, left America with the highest corporate income tax rate in the industrialized world.  Furthermore, because state corporate income taxes are levied in addition to the federal tax, state tax systems are not competitive internationally even if the state system by itself is reasonable, says Joseph Henchman, an attorney and policy analyst at the Tax Foundation.

Low corporate tax rates are essential in governments' efforts to attract businesses to locate operations within their borders, thereby providing jobs to residents.  Currently, state governments are engaging in two broad practices that harness the tendency on the part of businesses to flee to the most tax-friendly location possible.

First, many states are issuing blanket reductions in their corporate tax rates.

  • Since 2007, eight states (Indiana, Kansas, Massachusetts, New Jersey, New York, North Dakota, Vermont and West Virginia) have reduced their corporate tax rates.
  • During that same period, only four states (Connecticut, Illinois, Maryland and Oregon) increased their rates.
  • This activity is in addition to other changes to corporate taxation that are neither rate increases or decreases, such as Michigan's switch from a complicated gross receipts tax to a standard corporate income tax.

Second, many states are routinely engaging in the practice of offering targeted benefits to individual companies to incentivize them to bring jobs to their states.

  • A comparison of the tax costs of seven "model firms" recently found that, for example, a pre-existing manufacturing plant in New Jersey pays an effective tax rate of 10.6 percent while an identical but new plant would pay only 5.9 percent, thanks to targeted tax incentives.
  • It remains disputed whether such targeted tax incentive packages are effective for long-term economic development, and some business types, such as retail, generally pay much higher effective tax rates than other types.
  • These targeted incentives often lead to bidding wars between states; Maryland's failed attempt to win Northrop Grumman's headquarters in 2010 (they located in Virginia) is a classic example.

Because of these tax changes, the revenue-raising potential of state corporate taxes has been largely undercut.  In 1979, state corporate income taxes made up 4.9 percent of total state tax revenue; that number dropped to just 2.6 percent in 2007.

Source: Joseph Henchman, "Trend #3: Corporate Tax Reductions," Tax Foundation, June 13, 2012.

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