Five Reasons Why States Can’t Create Jobs by Cutting Business Taxes

April 28, 2011 at 11:30 am

Despite large budget shortfalls, states like Florida, Michigan, and New Jersey are considering new business tax cuts in the hope that this will generate job growth.  This strategy isn’t likely to work, for several reasons:

  1. States’ balanced-budget requirements mean that they will have to pay for this loss of tax revenue by raising taxes elsewhere or reducing services.  But if states have to cut way back in the number of teachers or cops on the beat or do without needed maintenance for roads and bridges, they’ll become less competitive.  Businesses aren’t attracted to states that lack services that they value, from good schools to well-maintained infrastructure.
  2. Businesses won’t hire new employees unless there is greater consumer demand for their goods and services.  Tax cuts for businesses won’t stimulate that demand.
  3. State and local business taxes constitute less than 2 percent of a firm’s costs, on average.  Trying to encourage employers to hire more workers by trimming this already-small cost further is akin to trying to wag a large dog by a very short tail.
  4. Many tax cuts are pure windfalls that reward businesses for doing what they would have done anyway.  That’s especially true for across-the-board cuts in business taxes.  But it’s also true for more narrowly tailored tax breaks that attempt to require a specific action, such as hiring more workers, because there is no practical way to prevent businesses from claiming the tax break if they would have made those hires anyway.
  5. States’ concerns that not cutting business taxes will place them at a competitive disadvantage vis-à-vis tax-cutting states are misplaced.  As Delaware Governor Jack Markell recently wrote after visiting hundreds of businesses:  “The number of business leaders who asked me to lower their taxes can be counted on one hand. . . .   What I hear most from business leaders is that they want the government to continue to improve our schools, reduce the time it takes to issue permits and licenses, enhance our transportation infrastructure, protect our arts community, strengthen linkages between our institutions of higher education and local companies. . . .  We’ve never succeeded as a country by racing to the bottom…. Now’s not the time to start.”
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More About Robert Tannenwald

Robert Tannenwald

Robert Tannenwald is a Senior Fellow in the Center’s State Fiscal Project.

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1 Comments Add Yours ↓

Comments are listed in reverse chronological order.

  1. Darius Thomson #

    1. This is moot because of the large number of states needing to generally reduce services; e.g.- California and Massachusetts. Businesses aren’t attracted to states with large taxes and debt burdens, and the “uncompetitiveness” of reduced state services is moot if most states are reducing services.

    2 & 3. I will comment that a stable political sphere that isn’t threatening a tax increase or greater financial or regulatory burdens gives business owners confidence to risk investment (i.e.- enterprises which lead to job growth). Companies under threat of increased costs, due to government mandates and regulations, will not risk their money out of fear that the business climate will change further due to additional government interference.

    4. Let me remind you that a tax is the government coming in and seizing your property (money). The government suddenly seizing less of your money is a windfall?

    5. You can’t cite Governor Markell’s rhetoric as anything more than an echo of the Democratic party’s talking points. He’s got too much to lose by rocking the boat to do anything more than parrot the party line.

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