Should Corporate Income Taxes Be Abolished at the State and Local Levels?
As the corporate income tax debate rages on, the discussion must extend beyond just firms' federal burden. Josh Barro points out that 44 states also levy corporate income taxes. He argues that these should all be abolished. But he doesn't necessarily say that this would lower effective tax rates for corporations. Instead, the federal base would be broadened, and states would be provided block grants to replace their lost income. What's the point? Barro explains that even if effective corporate rates didn't decline, firms would be better off because a simpler tax regime would lower their compliance costs. He says there's an even bigger advantage, however:
But more important than direct compliance costs are the economic distortions caused by state corporate income tax. Multistate corporations have significant leeway to determine the jurisdiction in which their income will be taxed -- whether by actually moving operations or through accounting shifts -- which had led states to enact beggar-thy-neighbor tax policies aimed at luring the most mobile firms to change states. When firms make business decisions designed to maximize tax advantages instead of pre-tax profits, the result is economic loss.
And states would also ultimately benefit from his proposal:
Conversion to a federal block grant would also make it possible to address one of the key drawbacks of corporate income tax as a government funding source: volatility. For example, state corporate income tax receipts were 17 percent lower in 2008 than 2007, according to Bureau of Economic Analysis data. While the federal government can run deficits to adjust for the effects of volatile revenues, states are forced to take painful fiscal adjustments when revenues fall sharply.
Read the full story at Real Clear Politics.