Stephen Slivinski

Lower State Corporate Tax to Woo Businesses

Posted on September 12, 2002 | Type: Op-Ed | Author: Stephen Slivinski
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Arizona has a long way to go before it can call itself a business-friendly state. Arizona's burden of state and local taxes on business as a percentage of gross state product is much higher than that of our competitor states Utah and Colorado. It is even higher than that of California, a state notorious for soaking businesses with high taxes.

Arizona's corporate tax rate of 6.97 percent is much higher than Utah's 5 percent and Colorado's 4.63 percent. Nevada doesn't even have a corporate income tax. The effective tax rate on business in Arizona - a reflection of what a company actually pays - is almost twice as high as Colorado or California's, and is more than twice as high as the effective tax rates for Utah, Oregon, New Mexico and Oklahoma. And many Arizona businesses pay the sixth highest property taxes in the nation.

Given Arizona's harsh business tax climate, it is not surprising to see homegrown pundits dreaming up ways for the government to woo favored industries to the state.

The Morrison Institute favors promoting a state "economic identity." The Greater Phoenix Economic Council says government action is needed to "stimulate strategic investment." And the Arizona Republic's John Talton believes that luring the International Genomics Consortium "would be the silver bullet that instantly makes Arizona competitive in the 21st-century economy."

Yet, the shortcomings of this state-controlled industrial planning should be plain to see. Government rarely picks winners in the economy. Indeed, private capital markets exist precisely because the job of picking winners is so difficult.

Millions of people earn their living by trying to direct private investment money to the best investments based on rates of return at various levels of risk.

Fund managers, let alone governments, do not have enough information to guarantee returns. Timothy J. Bartik, an expert on economic development programs, finds that these schemes usually result in failure.

Among the problems facing economic development agencies is that they "cannot read the minds of firms to tell whether a subsidy is really needed."

In addition, these "corporate welfare" schemes reinforce the incestuous relationship between business lobbyists and state government. By selecting some corporations for special treatment at the expense of other businesses, the government creates a patently unfair spoils system.

Instead of parceling out special favors for special interests, legislators can lure businesses to the state, and encourage Arizonans to start their own businesses - by lowering corporate taxes across the board.

In a new Goldwater Institute study, I recommend six different ways to reduce taxes for Arizona businesses. For each of the options, I project the results in terms of job growth and impact on state government revenue.

The most modest of the proposed reforms is to lower the corporate income tax rate to 5.04 percent, equalizing the top taxation rates on personal and corporate income.

This reform would reduce taxes by $74 million, create an estimated 10,000 new jobs, and remove the economic distortions caused by taxing different types of income at different rates.

A better step would be to lower the corporate income tax rate to 4.63 percent, equal to Colorado's flat corporate income tax.

This reform would decrease corporate taxes by $117 million, create 12,000 new jobs, and make Arizona more competitive in the region. It would also be a tax cut for shareholders, consumers and workers, since these are the people who ultimately pay the corporate income tax, through lower stock prices, higher prices or lower wages.

The best option for Arizona is to eliminate the corporate income tax entirely. Eliminating the corporate income tax would reduce taxes by $266 million, create more than 35,000 new jobs, and make Arizona more competitive with neighboring Nevada, Texas and Wyoming, which don't tax corporate income.

Best of all, elimination of the corporate income tax would remove the bias in the tax code against business investment. To make this proposal revenue-neutral for the state budget, I recommend suspending the state's over-funded unemployment insurance tax for one year, and reducing the rate to 0.5 percent thereafter.

Whatever option policymakers choose, they should focus on reducing taxes for all of Arizona's corporations. That's the real way to woo business.

Stephen Slivinski is director of tax and budget studies at the Goldwater Institute.

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