Guest opinion: Reducing taxes for businesses is not a good idea
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Based on my 30 years working in the private sector, and as interim director of the Iowa Department of Economic Development in 2009, I do not think the proposal by Gov. Terry Branstad and many legislators to reduce business taxes by $300 million makes good business sense.
There are three reasons why I don't agree with this proposal:
First, the key reason Iowa does not need reductions in business taxes to spur economic growth is that Iowa's overall taxes are already well below average compared to other states. Yes, it's true Iowa's nominal corporate tax rate at 12 percent is one of the highest, and commercial property taxes are high, too.
To really know what a business pays in taxes, one must take into account Iowa's generous list of business tax credits, which in fiscal 2006, according to the Iowa Department of Revenue, added up to $139 million and in fiscal 2010 was already $188 million. The Revenue Department projects that figure to grow to $233 million in fiscal 2012. As a result, because of these tax credits, each year several of Iowa's largest employers pay little or no Iowa taxes.
It's no surprise a recently completed study by Ernst & Young for the Council on State Taxation found that overall taxes on business in Iowa, including state and local taxes, are lower than the national average, and only 15 states tax business more lightly. Other studies, such as the Milken Institute Cost of Doing Business Index (2007), found Iowa to be one of the lowest-cost states to do business and well below average in tax burden. Hence, a further reduction would likely have a minimal impact on job creation.
Second, my own experiences in numerous site location decisions, including several in the Midwest, and most every study I have ever seen on the subject, clearly indicate that quality of the labor force, availability of local infrastructure to meet businesses' needs and overall quality of life for potential employees and management are more important in a company's job-location decision than business taxes.
Particularly when Iowa's overall business taxes are already lower than most states to begin with, if the governor and others still insist on spending this $300 million, it makes better economic development sense to use the money to make targeted investments to improve the competitiveness of Iowa's labor force, business infrastructure and quality of life to truly support job creation.
Third, Iowa already is faced with a large budget shortfall for fiscal 2012, so why increase that by almost 50 percent? Cutting business taxes by $300 million could result in an immediate, annual reduction in state revenue, and it could take years for any new job creation caused by such a tax reduction to generate enough new revenue to cover the lost tax revenue. In the meantime, other parts of the state budget would need to be reduced to pay for this new shortfall, which could result in layoffs and job reductions elsewhere, meaning overall unemployment in Iowa might not change significantly and could even increase.
A more sensible approach would be for the Legislature and governor to pass legislation that solves the $700 million budget shortfall for fiscal 2012. Once that is completed, and the public can see where the impacts are felt, the Legislature and governor could begin discussing whether a corporate tax cut and/or targeted investments are needed to support job creation.
If such additional legislation is passed, they should agree as part of that legislation on how it would be paid for with other revenues or additional spending reductions so a further deficit would not be created in fiscal 2012 and beyond.
There are three reasons why I don't agree with this proposal:
First, the key reason Iowa does not need reductions in business taxes to spur economic growth is that Iowa's overall taxes are already well below average compared to other states. Yes, it's true Iowa's nominal corporate tax rate at 12 percent is one of the highest, and commercial property taxes are high, too.
To really know what a business pays in taxes, one must take into account Iowa's generous list of business tax credits, which in fiscal 2006, according to the Iowa Department of Revenue, added up to $139 million and in fiscal 2010 was already $188 million. The Revenue Department projects that figure to grow to $233 million in fiscal 2012. As a result, because of these tax credits, each year several of Iowa's largest employers pay little or no Iowa taxes.
It's no surprise a recently completed study by Ernst & Young for the Council on State Taxation found that overall taxes on business in Iowa, including state and local taxes, are lower than the national average, and only 15 states tax business more lightly. Other studies, such as the Milken Institute Cost of Doing Business Index (2007), found Iowa to be one of the lowest-cost states to do business and well below average in tax burden. Hence, a further reduction would likely have a minimal impact on job creation.
Second, my own experiences in numerous site location decisions, including several in the Midwest, and most every study I have ever seen on the subject, clearly indicate that quality of the labor force, availability of local infrastructure to meet businesses' needs and overall quality of life for potential employees and management are more important in a company's job-location decision than business taxes.
Particularly when Iowa's overall business taxes are already lower than most states to begin with, if the governor and others still insist on spending this $300 million, it makes better economic development sense to use the money to make targeted investments to improve the competitiveness of Iowa's labor force, business infrastructure and quality of life to truly support job creation.
Third, Iowa already is faced with a large budget shortfall for fiscal 2012, so why increase that by almost 50 percent? Cutting business taxes by $300 million could result in an immediate, annual reduction in state revenue, and it could take years for any new job creation caused by such a tax reduction to generate enough new revenue to cover the lost tax revenue. In the meantime, other parts of the state budget would need to be reduced to pay for this new shortfall, which could result in layoffs and job reductions elsewhere, meaning overall unemployment in Iowa might not change significantly and could even increase.
A more sensible approach would be for the Legislature and governor to pass legislation that solves the $700 million budget shortfall for fiscal 2012. Once that is completed, and the public can see where the impacts are felt, the Legislature and governor could begin discussing whether a corporate tax cut and/or targeted investments are needed to support job creation.
If such additional legislation is passed, they should agree as part of that legislation on how it would be paid for with other revenues or additional spending reductions so a further deficit would not be created in fiscal 2012 and beyond.
