Corporate income taxes pay for important public services, including those that help businesses succeed and grow: education, highways, health care and public safety. The Center on Budget and Policy Priorities finds that cutting corporate income taxes would be unlikely to promote job growth, and would undermine important public investments.
Here are a few of the arguments.
State corporate tax cuts provide little short-term stimulus. Most states, including Minnesota, have to balance their budgets, and as a result, there isn’t much they can do to stimulate the economy. States that cut their corporate income tax will have to make up that lost revenue, either by raising other taxes or further cutting services. Cutting services reduces the amount that the state is spending on goods and services in the economy. (In addition, these cuts can have a negative impact on long-term economic growth by reducing public services that contribute to future economic growth, such as higher education.)
Corporate tax cuts do little to create jobs. There’s no guarantee that tax cuts will be used to create jobs, especially if there isn’t market demand for more of what the company provides. Companies need increased demand to spur hiring, not tax cuts. In its 2008 paper Options for responding to short-term economic weakness, the Congressional Budget Office wrote, “Increasing the after-tax income of businesses typically does not create an incentive for them to spend more on labor or to produce more, because production depends on the ability to sell output.”
State corporate taxes are a minor expense for most corporations. All state and local taxes represent two to three percent of corporate expenses, and the corporate income tax is only a small fraction of that. It’s hard to imagine that a reduction in such a small piece of a company’s budget will have a major impact on their economic behavior.
In the real world, tax cuts have not brought about stronger-than-average economic growth. Ohio eliminated its corporate income tax, but has not seen a significant boost to their economy. Their state’s economy has experienced average performance, at best, ever since. Despite a $1 billion-plus drop in annual corporate income taxes, “Ohio’s share of national income, employment, and investment have all fallen slightly since 2005,” the Center on Budget and Policy Priorities said.
Any decisions about corporate taxes in Minnesota should also take into account the context, which is that there is a tax cut for multi-state corporations already occurring right now, and that corporate taxes are declining as a share of the revenue picture.
- Multi-state corporations are receiving a tax cut from Minnesota through the “single sales tax apportionment” of corporate taxes. Passed into law in 2005, the state is gradually changing its corporate tax to be based on more a company’s amount of sales in Minnesota – becoming 100 percent based on sales in 2014. It will no longer take into account a company’s Minnesota-based payroll or property. The big winners from this change are multi-state companies that have facilities and workers in Minnesota, but mostly out-of-state sales. (Companies with a significant amount of sales in Minnesota, but small amounts of their total facilities and employees here, actually pay more.) The Minnesota Department of Revenue estimates that single sales factor translates into $214 million less in state revenue in FY 2013.
- Over the past three decades, Minnesota corporate income taxes have become a smaller share of state and local government revenues, although it fluctuates considerably with the business cycle. According to the Minnesota Department of Revenue, corporate taxes were 8.4 percent of all state and local revenue in 1980. In 2009, they were 3 percent of total Minnesota state and local revenue, the second lowest rate since 1962.