One of the most eye-popping parts of the Senate tax reform plan is the proposed elimination of the state’s Corporate Income Tax, for a cost of $1 billion in foregone revenue each year. Although Senate leaders have expressed high hopes for the economic benefits of this tax cut, they are likely to be disappointed—corporate tax cuts have repeatedly been proved to be a poor strategy for boosting the economy.
Perhaps the biggest reason for this failure is that only a small fraction of the additional income given to these corporations through tax cuts is spent within the state giving the tax cut. And if North Carolina acts like the rest of the economy, then corporations will put just 10% of this tax cut back into North Carolina. The remaining 90% will be distributed to shareholder across the globe, or invested in other states and nations.
So why will North Carolina receive just 10% of the benefits of scrapping the corporate income tax? Follow us below the fold to find out.
Most economists generally agree that corporate income taxes, at both the state and federal level, fall primarily on owners of capital. As a result, the benefits of state corporate income tax cuts are typically distributed according to nationwide ownership of capital assets such as stocks and bonds. Because the big and highly profitable corporations that pay the vast majority of state corporate income taxes are multi-state or even multi-national corporations, whose shareholders live around the world, a distributional analysis of a given state’s corporate income tax will typically assign much of the tax to residents of other states. This is why most incidence analyses (including the ones performed on North Carolina proposals by the Institute on Taxation and Economic Policy) show a fairly small impact of a given state’s corporate income tax on residents of that state—in this case, consensus points to just 10%.
Additionally, aside from losing 90% of the tax cut benefit to shareholders and investors outside of North Carolina, corporate tax cuts generally make poor strategy for boosting economic growth because corporations are unlikely to expand or relocate because of state income tax cuts. State and local taxes are typically only 2 percent or less of business costs. Expenses for labor, property, equipment, and transportation are much more substantial.
Far more important to businesses’ decisions about hiring is whether there is customer demand. Today demand is low, which is why so many companies across the nation are sitting on record profits rather than expanding. A business that gets a tax cut will not hire if it doesn’t feel it can sell more of what it makes. And when demand does increase, businesses will hire whether they have gotten a tax cut or not.
The evidence is clear—eliminating the corporate income tax is a poor strategy for boosting North Carolina’s economy.