Saturday, March 6, 2010

Do Corporate Taxes Hinder Employment and Growth?

In the 8th State of the State Address given by Governor Tim Pawlenty, he called for a reduction in corporate taxes and small business income taxes as well as breaks for funding for research and development. As reasons he cited that Minnesota ranks 43rd in business tax climate and the “third highest corporate tax rate in the developed world” I believe this comes from the U.S. corporate tax rate (currently second in the world at 39.25% in 2009, barely behind Japan at 39.54%) combined with the Minnesota corporate tax rate (third highest in the U.S. at 9.8% behind Washington DC and Pennsylvania, Iowa has a higher rate for companies making over $100K)

Governor Pawlenty argues that cutting corporate taxes will help spur job creation and economic growth. But are “business tax climate” ratings and corporate tax rates the best way to measure outcomes?

Unemployment is high at 7.4% but this rate is still well below the national average of 10.0% and better than all but 12 other states. Minnesota also has 19 Fortune 500 companies which ranks us 9th in the country well ahead of the population ranking of 21st. From 2007 to 2008 the state GDP grew 4.1% which was 17th and well above the national average.

Citing corporate tax rates and business tax climate Tim Pawlenty said “It's a no brainer. Companies make common sense decisions to grow and add jobs where it costs less.” But some of the stats above say there is more to the story than just corporate taxes.
Site Selection magazine publishes a report of the top states when it comes to economic development by looking at new projects with at least $1 million capital investment, 50+ jobs created and 20,000+ square feet of floor space created. Ohio won this year and credited tax policy with helping it win, although it came in behind Minnesota (43rd, see above) at 47th in business tax climate. They also credit availability of capital, low electricity costs, good schools and reduced red tape. Minnesota was first in our region with 77 new projects in 2009 and 314 in the last 3 years.

When companies make more money there is a larger tax base, likewise new companies will increase the tax base. By creating jobs, companies also create taxpayers. Whether the increased tax base will outweigh a reduction in tax rate is still yet to be seen, but it appears there is more to economic development and job creation than just corporate tax rates.

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