Saturday, May 7, 2011

States Retain Business Levies

Saturday, May 7, 2011

Governors trying to cut business taxes are running into unexpected resistance from both Republican and Democratic lawmakers.

Gov. Rick Snyder has proposed changes to Michigan's tax code that would reduce corporate income taxes by $1 billion for the fiscal year beginning Oct. 1 and $1.7 billion the following year. He has had to compromise with fellow Republicans who control the legislature, though, and even the watered-down changes still might not pass.


Michigan Gov. Rick Snyder and Florida Gov. Rick Scott have had their plans for big corporate-tax cuts thwarted by fellow Republicans.

Mr. Snyder said the tax overhaul would help create jobs in his hard-hit state. "We think there is a correlation—the hard part is to quantify it," he said in an interview. "It isn't just about cutting taxes. It's to make a fair tax system."

Republican Gov. Rick Scott of Florida has been pushing to lower—and eventually phase out—his state's corporate income tax, which he says would help create 700,000 jobs over the next seven years. He, too, has faced opposition from his own party.

Governors in at least seven states have called for broadly lower corporate income taxes. Many more, Democrats and Republicans alike, have pushed for narrower corporate-tax cuts and greater incentives during budget-writing sessions. But lawmakers in both camps have balked at choking off potential revenue sources while cutting significant funds for education, health care and services for the elderly and disabled.

Zuma Press

Florida Gov. Rick Scott

The corporate income tax accounted for 5.4% of state tax collections last year, according to the Census Bureau. The personal income tax made up the largest portion of state tax collections, about one-third (33.5%), followed by sales taxes at 31.9%.

In Georgia, newly elected Republican Gov. Nathan Deal campaigned on cutting the corporate income-tax rate by one-third, but was unable to persuade lawmakers in his party to support it. In Iowa, GOP Gov. Terry Branstad has made little headway in getting the legislature to cut the state's corporate income-tax rate in half; Republicans control the House, Democrats the Senate.

Arizona and North Dakota, both with GOP governors, succeeded in lowering their corporate income-tax rates this year.

State tax collections have begun recovering along with the economy, but most states still are bringing in less than before the recession. All states except Vermont are required by law to balance their budgets.

The potential benefits of corporate-tax cuts have been debated for years, and politicians of all stripes often tout them as a way to boost employment. Research indicates doing so provides, at best, a slight boost to long-term economic growth. State and local taxes account for just 1% to 2% of corporations' overall costs, said Robert Lynch, an economics professor at Washington College in Maryland and the author of a comprehensive survey of state taxes' effect on economic development.

Some research suggests jobs are gained only if tax cuts don't hurt public services that tend to attract businesses, such as education and infrastructure. In practice, because of state balanced-budget rules, spending on those services usually declines to offset lower tax collections.

"It's become almost a religion at the state and local level to believe that one of the ways to promote economic growth is to cut business taxes," Mr. Lynch said. "The studies show, overall, that taxation does not figure prominently in either business location or investment decisions."

In Michigan, Mr. Snyder would pay for cuts by taxing some retiree pension income and eliminating the state earned-income tax credit for low-income workers, which has been in place since 2006.

The proposal has united opponents ranging from advocates for the poor to senior citizens to lawmakers critical of any tax increase.

Michigan state Sen. Joe Hune, a Republican, said he supports Mr. Snyder's proposed cuts to corporate taxes but doesn't want pensions taxed to offset them. He said he hasn't decided how he would vote on the budget.

"It's just unpalatable for me to place a $300 million burden on seniors in Michigan when we could find a heck of a lot more spending cuts," he said.

Senate Democrats also oppose the tax plan, saying the governor shouldn't reduce state revenue when Michigan already has to cut education spending to close a $1.5 billion budget shortfall. "In the crisis we're facing, to give this enormous tax break is a bit of an overreach, especially when we're asking kids and seniors to pay for it," Senate Democratic leader Gretchen Whitmer said.

Mr. Snyder already has agreed to alter his original plan, including a compromise that exempts residents who are age 67 or older as of Jan. 1, 2012, from paying taxes on their pensions. The state House also partially restored the earned-income tax credit by voting to allow a credit of $25 per child.

"The goal is not to tax people at lower levels," the governor said. "It's having people pay who have the wherewithal to pay."

Florida's Mr. Scott said he would veto any budget that didn't include his plan to lower corporate income taxes. This week, he agreed to a deal raising the corporate income-tax exemption to $25,000 from $5,000. That would exempt about 15,000 small businesses from paying income tax. The cost to the state would be $30 million in the first year. The legislature was expected late Friday to pass the changes as part of the budget.

"If we don't grow jobs in this state, we will continue to see less money available to provide a quality education for our young and fund other important services," said Lane Wright, a spokesman for Mr. Scott.

In Florida, a bipartisan group of lawmakers objected to making deeper spending cuts to accommodate Mr. Scott's proposed tax reductions. The state faced a $3.7 billion deficit without accounting for lost revenue from tax cuts.

"I'm a great fan of tax cuts," said state GOP Sen. Don Gaetz. "But first we have to cut spending. Then we have to cut taxes or fees that affect working families and small businesses. Nobody that I represent is asking me to cut taxes on corporations."

Write to Amy Merrick at

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