Despite Red Ink, Some Governors Push Big Tax Cuts for Businesses

By: - February 14, 2011 12:00 am

After a banner election year that gave them control of the executive office in 29 states, many Republican governors are leaving little doubt where they stand on taxes, issuing blunt warnings to lawmakers not to pursue tax hikes as they balance their budgets in the months ahead.

“A recession is the worst time to raise taxes,” South Dakota Governor Dennis Daugaard told lawmakers in his state of the state address January 11. “If you send me a bill to raise taxes, I will veto it.”

“I want to be very clear,” Nebraska Governor Dave Heineman said January 13 . “I am opposed to any income, sales, alcohol, cigarette or gas tax increases.”

“New Mexicans are not under-taxed. The government has simply over-spent,” Governor Susana Martinez told lawmakers January 18. Rejecting not only tax hikes but any proposals including “revenue enhancements,” she added, “They can be called many things, but they will all be vetoed.”

Tax cuts on tap

Source: Stateline analysis of governors’ speeches

It should come as no surprise that Republican governors are ruling out tax hikes. According to a Stateline tally, at least 11 new Republican governors — and one Democrat, Andrew Cuomo of New York — made campaign pledges not to raise taxes . Several other governors of both parties have announced no-tax-hike intentions in state of the state speeches delivered to lawmakers over the last six weeks. (Click here for Stateline ‘s database of all speeches .)

More surprising is that GOP governors in Florida, Iowa, Michigan and elsewhere want to go a step further. In what is widely considered the worst year yet of states’ four-year budget crisis, these governors are promising big tax cuts for businesses and, in some cases, individuals.  The proposals reflect their conviction that one of the best ways to spur business growth and job creation is to reduce taxes for those who do the hiring.

Betting on business

In Florida, the state’s more than $3.5 billion budget gap isn’t stopping Governor Rick Scott from pushing $2 billion in business and property-tax cuts. “We’re going to become the number one state for job creation,” Scott told a raucous Tea Party crowd when he presented his two-year budget last week. Scott’s plan reduces the corporate income tax — already one of the lowest in the nation — by 45 percent, and phases it out entirely by 2018.

In Michigan, which faces a shortfall of $1.8 billion, Governor Rick Snyder is set to unveil a budget proposal this week that also will include a major tax cut for businesses. Though many details are not yet known, Snyder will seek to eliminate a gross receipts tax for businesses and replace it with a flat, 6 percent corporate income tax. He acknowledges the move could cost Michigan $1.5 billion, although he is expected to offset at least some of that loss with other revenue moves, such as eliminating an income tax credit for working families.

In Iowa, where lawmakers are moving to cut pre-kindergarten, the court system and other services, Governor Terry Branstad wants to cut the small business tax rate in half and reduce commercial property taxes by 40 percent over five years. He told lawmakers in his state of the state address January 27 that he is counting on economic growth to help pay for the tax cuts, but he also wants to raise casino taxes to help offset the loss.

Republican governors C.L. “Butch” Otter of Idaho and Chris Christie of New Jersey also have proposed tax cuts. Otter is facing at least a $137 million budget gap over the next 18 months, but is also pushing lower personal and corporate income tax rates starting in 2013. New Jersey’s finances are in such poor condition that its bond rating was downgraded last week, but Christie has promised to unveil a budget later this month that will “reform the taxes we place on business and individuals and begin to roll them back.” He stressed, however, that he will not pursue any cuts “that we can’t pay for.”

GOP governors argue that providing relief to companies will lead those firms to invest more heavily, pick up production and hire new workers in their states, even though the effects on state revenues could be negative — and in some cases deeply negative — in the short term.

“It seems counterintuitive to people, but it’s good to see (governors) being proactive,” says Kail Padgitt, an economist at the Tax Foundation, which advocates for lower tax rates. “We’ve seen signs that the economy is recovering, albeit slowly, and I think these (governors) are realizing that businesses are going to look to expand. Taxes are something they’re going to take into consideration.”

Not so fast, some analysts warn

There is little doubt that taxes matter to businesses, but there is a sharp debate over how much, especially when states must cut services to offset their tax cuts. Spending decisions that disrupt local education, transportation and court systems also matter to companies.

In Florida, Scott has suggested that he can pay for his business and property tax cuts by finding efficiencies in state government. In a videotaped interview with The Wall Street Journal , Scott pointed to the consolidation of state agencies — and his own decision to forgo the state plane that previous governors have used — as key money savers. “You add it up, it adds up to pretty big dollars,” Scott said.

But budget analysts say such moves will be nowhere near enough to patch Florida’s budget gap, let alone pay for a $2 billion tax cut for businesses and property owners. Democrats warn that spending cuts of the magnitude needed to compensate for Scott’s tax cut will decimate schools and other services, and even Republicans who control the state legislature have given the plan an unusually cool reception, raising doubts about whether it will ever become law.

Meanwhile, there is also broad skepticism among many economists over what businesses in Florida and elsewhere will do with the money they receive from any major state-level tax cuts.

Major firms with locations around the country could easily take the dividend from one state’s tax cut and invest it somewhere else. Meanwhile, corporate profits are surging and the stock market is booming, but national unemployment remains at 9 percent. That suggests that the money now sitting in companies’ pockets is not going toward hiring new workers or ramping up production.

Padgitt, of the Tax Foundation, believes that firms are waiting for the economic recovery to begin in earnest and “to be at a place where they can invest.” He says state tax cuts will help them get there. But others argue that national economic patterns play far more of a role than state-level tax rates.

“State tax policy is not what caused 10 years of economic collapse in the state of Michigan,” says Gary Olson, the recently retired director of the Michigan Senate Fiscal Office. “When you go from domestic auto sales of 10 million units to 4.3 million units in the course of about a decade, that’s the problem in the state.”

The Ohio experiment

According to the Center on Budget Policy and Priorities, a Washington, D.C., think tank that is critical of broad tax-cut plans, only Ohio has done what Scott is proposing to do in Florida — completely phase out its corporate income tax. That makes Ohio a prime test case for other states seeking to cut or abolish business taxes in the hopes of spurring growth.

Michael Mazerov, a CBPP economist, found in a September study that “despite a more than $1 billion annual reduction in business taxes, Ohio’s shares of national income, employment and investment have all fallen slightly since 2005,” when the phaseout of the state’s corporate income tax began.

Ohio tax officials concede that the plan has not produced a windfall of new business activity. But they are quick to point out that they never expected one, predicting beforehand that eliminating the corporate income tax would amount to a net loss in revenue for the state, at least in the short term.

 “In 2005, we were in the midst of an (economic) expansion, and part of the feeling was, ‘We can afford to do this,’ ” says Fred Church, deputy director of policy at the Ohio Department of Taxation and a veteran of the agency. Church also notes that the final year of the five-year phaseout was just two years ago, while most businesses were still struggling because of the recession. “Maybe this is going to be a different story,” he says, “if you look three or four years down the road from now.”

See related stories:

Jobs plans dominate 2011 state of the state speeches (1/27/2011)
Facing big deficits, a dozen new governors rule out tax hikes (11/4/2010)

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