A Flawed Case Against Cutting Virginia’s Corporate Income Tax

Source: The Commonwealth Institute.

Source: The Commonwealth Institute.

by James A. Bacon

The Commonwealth Institute has criticized Commonwealth Attorney Ken Cuccinelli’s proposal to stimulate economic development by cutting the corporate tax rate from 6% to 4%.  The corporate income tax generated $860 million in General Fund revenue in 2012, equivalent to what the state spends on law enforcement, states CI in a new white paper, “Would a Corporate Income Tax Cut Hurt Virginia’s Ability to Invest in the Future?“.

CI argues that a lower corporate tax rate would do little to improve Virginia’s already-positive business climate because corporate taxes are not a “make or break” proposition for business. Corporations base investment decisions upon a range of factors, most notably the quality of the workforce, the quality of the transportation system and access to markets. Because the corporate income tax is paid primarily by big, multi-state entities, 75% of a Virginia tax reduction would be retained outside the state.

“Without the corporate income tax,” says CI, “out-of-state investors and shareholders would benefit from Virginia’s strong business climate essentially at no cost because they don’t live or work here.” The paper continues:

If we pay for the tax cuts by reducing incomes for people right here in the commonwealth — by laying off teachers, cutting worker hours, or raising taxes on low-income people and the middle class, for example — then people will have less money to spend in their communities, and that will hurt the state’s economy.

There’s just one little problem with CI’s argument…. Cuccinelli’s tax overhaul plan would not cut income tax rates by “laying off teachers, cutting worker hours or raising taxes on low-income people and the middle class.” Far from raising taxes on individuals, his stimulus proposal would aim to cut the top personal income tax rate from $5.75% to 5.0%.

Cuccinelli, the Republican candidate for governor, would pay for the lower corporate rates by expanding the tax base — eliminating outdated tax exemptions and loopholes that, in his words, “promote crony capitalism.” (See my coverage of his proposal here.) Admittedly, he has not specified what those loopholes are, and there is no guarantee that he can find enough to offset the loss of a couple hundred million dollars in lost corporate income tax revenue. If he cannot find enough loopholes, then he might not be able to cut the corporate tax rate as much as he would like. But in that case, CI wouldn’t have much to criticize.

The Cooch also advocates limiting the growth in state spending to the rate of inflation + population growth. While I am skeptical of such Tax and Expenditure Limits (TELs), curtailing increases in spending is hardly the same as “laying off teachers,” who are paid by local governments in any case.

The only substantive argument CI makes is that lowering the corporate tax rate really won’t stimulate business investment. It is fair to say that the tax rate is only one factor among many (see the chart above)…. But it is a factor. While a lower tax rate might not prove decisive very often, it might make a difference, as economists might say, “on the margin” — in instances when the decision to invest in Virginia is a very close call.

As a general principle, Virginia should strive to create (1) a balanced tax structure that is not overly dependent upon any one revenue source, (2) a broad tax base with a minimum of exemptions, deductions and credits, and (3) tax rates that are as low as possible. Cuccinelli’s proposal would move us in the right direction.

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6 responses to “A Flawed Case Against Cutting Virginia’s Corporate Income Tax

  1. Broad-based taxes with wide coverage and low rates causes less market distortion and often generates more money for the public fisc. A number of state legislators, including Mark Keam (D), have been looking at how to close the many loopholes and giveaways in the state tax code. More power to him.

  2. Pingback: A Flawed Case Against Cutting Virginia’s Corporate Income Tax | The Commonwealth Institute

  3. Not identifying the loopholes etc. is even worse than Bob McDonnell’s campaign transportation plan where identified selling ABC stores as the source of revenue – and then it didn’t even happen (not saying that was a good idea either). Its simply a zero accountability plan.

  4. In my perfect world, candidates for Governor (really, candidates for any executive office from the President down to Mayor), should be required to prepared their “ideal budget” for the first fiscal year they’ll be in office, then submit it to the public with a few months to digest it before the election. Then we can see exactly how the “tax cuts” a candidate promises are going to reflect in the state’s spending plan, and preventing candidates from doing this kind of “we’ll work out the details later” BS.

    Obviously, some things change in the months between election season and the next budget cycle, and they of course would still have to convince a legislature to pass it, but I would just love to see good hard numbers applied to all these promises.

    Added bonus, we can then hold those officials accountable if we elect them and their vision.

    Note, this is not a partisan thing. It’s obviously something no one does, as both parties are always guilty of keeping their election season promises fuzzy at best. Still… in my perfect world…

  5. The Commonwealth Institute used to put a bit more thought into these things but it has become predictably knee-jerk leftist and tiresome to boot. That is a campaign document, not a reasonable argument. You are slipping, Cassidy.

    Reducing the CIT in Virginia to 4 percent and reducing the personal income tax rate to 4 percent, coupled with changes in deductions or credits or other preferences, is very easy to envision. Revenue could be about the same. The preferences eliminated may prove popular and hard to implement, but doing it would be very possible. No teacher layoffs. Frankly, just cutting both top rates (corporate and personal) to 5 percent would accomplish the public relations, job recruitment impact desired. It would generate plenty of headlines in the WSJ.

    Ignore the corporate income tax. I’m pretty familiar with state and local business taxes. What are the OTHER taxes that a business might have to pay? Just to put the CIT in context (after all, that is the tax you only pay on profit. Not all businesses even make a profit every year.)

    1) Real estate tax
    2) Business personal property tax on vehicles (no car tax break for business vehicles).
    3)Telecommunications sales tax — 5 percent on all internet, phone, satellite, etc.
    4) Local utility tax on electric, water and sewer, natural gas, etc. There are also state taxes on utility bills. You should really look at your Dominion bill someday and note the taxes buried there. Well, business pay more.
    5) Storm water management tax, if the facility has paved surfaces.

    (Getting tired?)

    6) State and federal unemployment tax on every employee, even if you never lay anybody off.
    7) FICA and Medicare taxes (employer share) on every single employee.
    8) Machinery and tools tax, if you have any of those things.
    7) Business and Professional License Tax (BPOL) for pretty much every occupation except manufacturing. This is the dreaded gross receipts tax, on every dollar of revenue with no regard for costs or losses.

    (Think I’m done?)

    8) Sales and use tax on many of your purchases, unless they are items for resale. Buy a laptop for your office? That’s taxed in full. And while individual routinely ignore the use tax on purchases from out of state, an army of auditors make sure business pays use tax on everything not purchased direct in Virginia.
    9) Sales and use and lodging taxes on business travel. Business travel is a huge part of the lodging industry and its all taxable.
    10) Sales and use taxes on business meals and entertainment.
    11) Rental taxes on vehicles and equipment.

    And if you do business in more than one locality, expect to waste time as two buzzards pick over your carcass trying to divide up the spoils. Both want a BPOL return and BPOL tax, for example, and they will gladly tax the same dollar twice.

    I’ve made my point. Government sticks money spigots into every business it can find and opens the taps to full. Local governments are the worst. I have to assume that at least half, at least half, of every dollar in revenue will go to tax (with the rest split between expenses and myself.) I don’t think cutting the CIT rate to 4 or 5 percent means business owners are off the hook.

  6. well.. businesses are just tax collectors, right?

    as long as the taxes are “equal” and no business is competitively disadvantaged….

    besides, businesses want an educated workforce, law and order, and commerce enabling transport infrastructure – right?

    The Cooch is just play the right-wing-echo-chamber game with his “balanced” but unspecified blather… just a Jr. version of the Romney ” revenue-neutral tax reform – but I have to kill you if I tell you how).

    the right wing knows no shame these days when it comes to rube voters…

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