Corporate Tax Breaks: Expensive and Inefficient

Arkansas continues its struggle to overcome the recession. We’ve all debated what should be done to bring in new jobs, promote economic development, and ensure a bright future. Sadly, rather than focusing on the most pressing needs of our citizens and improving the long term quality of our workforce, the major focus of this legislative session appears to be cutting taxes for upper income taxpayers and corporations in a misguided attempt to promote economic development in the state.  The idea is that if you cut taxes for the wealthy and corporations the state will attract new jobs and grow. But in reality, these kinds of tax cuts are expensive and inefficient for a state to take on. It also discounts many important factors related to economic development, the reason a corporation would locate their business in a state, and what benefits the state receives from certain policies.

This argument ignores a long body of research that taxes, especially income taxes alone, are not a major factor in the location and expansion decisions of most businesses. That would be shortsighted. Without a well trained and high quality workforce and an infrastructure system (such as roads, utilities services, and public safety) that meet a company’s needs, what would be the point? Corporations need to find locations that allow them to make the best use of their resources and works in the framework of what they are providing or building. Tax rates have very little impact on these vital factors. Truly, an educated workforce prepared for the work involved is more important than almost any other factor.

Corporations use many services and goods that are paid for by taxes, and they should pay their fair share.  A policy brief recently published by the Iowa Fiscal Partnership makes a very important point. “Corporations doing business in a state benefit from investments that state government has made in education, infrastructure and public safety services. Government is responsible for educating workers and the children of those workers, and for building, maintaining and policing the roads that businesses rely upon. Since a corporation’s ability to generate profits from its operations in a state depends on public services, corporations should pay their share of cost for providing those services.” Also, when new companies move into a state, they tend to increase the demand for these resources but are often times not required to pay for them.

Finally, state local taxes on business are a small portion of their cost of operation. On average, these taxes represent about 1.8% of the cost of doing business.  With corporate taxes being such a small part of the costs a company incurs, it makes very little sense to make economic development decisions based on this idea.

For detailed analysis of the impact corporate taxes on states, check out the Iowa Fiscal Partnerships policy brief titled:“Corporate Taxes and State Economic Growth.”