Well, we could debate for days on exactly who bears the burden of the tax on corporate profits, shareholders or workers, but we?d probably bore our readers to tears. Certainly, some level of fair tax rate competition between states is beneficial because it encourages efficiency and innovation as states try to maintain and enhance the quality of public services and keep costs in check. But cutting business taxes under current conditions fails the following two basic tests of good public policy.
One, it is not likely to improve the state?s long-term economic outlook. For more than twenty years, researchers have been studying the influence of state and local tax policy on the level and distribution of employment and investment. The majority of this research has demonstrated that taxes do not have a substantial effect on economic activity among states. The studies that have shown a statistically significant impact of taxes on economic performance generally hold other critical variables constant. Those other variables, such as the quality of public services, the availability of an adequately-trained labor force, and the cost of energy are often more influential than differences in tax burdens.
Two, it is not worth the tradeoffs ? tradeoffs like shifting the tax burden to lower-income families or forcing even more budget cuts than state services have already endured. The fiscal crisis of the last three years has forced state government to scale back dramatically. In fact, state general fund spending is $272 less per capita after adjusting for inflation than it was in 2000-01. If the state?s general fund had kept pace with inflation and population growth during this period, the general fund budget would be $2.3 billion larger that it is today. Furthermore, the tax increases enacted since the fiscal crisis began have fallen disproportionately on low- and moderate-income families. Approximately 90% of the revenues from the tax increases enacted during the fiscal crisis comes from the two _ cent sales tax increases (one state and one local). Less than $100 million per year is being generated by the one progressive tax increase during the period ? the creation of the new 8.25% income tax bracket on the state?s highest income earners.
Finally, Roy, I would take issue with your rather pessimistic (fatalistic?) argument that tax policy is the only way that government can impact long-term economic development and job creation. Such an argument wrongly discounts the power and efficacy of public investments in workforce (through enhanced public education, job training, health care and other core services) and infrastructure (through enhanced transportation, communication, public utilities, etc.).
As North Carolina moves forward, restoring the solvency of the state budget and making crucial public investments in our future, and/ or lowering the tax burden on working families should both take precedence over any reductions in business taxes.
Thanks to the John Locke Foundation for hosting this debate and to Roy Cordato for being such an able sparring partner.
