A slew of Republican governors, even as their states face deficits in the billions of dollars, have decided to propose new corporate tax breaks as a way to boost their state economies. Gov. Rick Scott (R-FL), for instance, has suggested $700 million in corporate tax breaks. Gov Rick Snyder (R-MI) proposed $3.3 billion, while attempting to cut the states Earned Income Tax Credit. Gov. Terry Branstad (R-IA) wants to do away with universal kindergarten in order to finance corporate tax breaks, and Gov. Chris Christie (R-NJ) has lined up corporate tax giveaways, while cutting education funding.
However, a new paper from Peter Fisher, Professor of Urban and Regional Planning at the University of Iowa and Research Director of the Iowa Policy Project, shows that these sorts of breaks yield very little in terms of real savings for companies, and therefore are of little use in attracting businesses to different states:
State and local taxes on businesses (corporate income taxes, sales taxes, local property taxes) represent only about 1.8 percent of total business costs on average for all states. Corporate income taxes, in turn, are only about 9.5 percent of the small amount of state and local taxes on businesses, according to one estimate. A large corporate tax break that reduces corporate income tax revenue by half thus represents a cost savings to the average firm of 50 percent times 9.5 percent times 1.8 percent, or just .09 percent. In other words, such a sizeable corporate income tax break would reduce total business costs by just nine-hundredths of 1 percent in the average state.
“The tax breaks to corporations do not stimulate consumer spending, and it is not clear how retailers can collect more sales tax if consumers are not spending any more money,” Fisher wrote, explaining why the breaks will do little to promote economic growth. “The tiny reduction in the costs of doing business cannot be expected to translate into retail price reductions, which is the only way sales could increase in the absence of a shift in the consumer demand curve.”
Some of these states, including Iowa and New Jersey, already collect very little in terms of corporate tax revenue, already. So it seems that these Republican governors are hoping against hope that even more corporate tax reductions will do what past reductions, credits, and giveaways did not.