By Lesley Weidenbener
TheStatehouseFile.com
Lesley Weidenbener, managing editor, TheStatehouseFile.com
INDIANAPOLIS – When Indiana lawmakers voted this spring to reduce the corporate income tax rate, they were joining hundreds of other legislators across the nation considering tax cuts.
But history shows these tax cut splurges can cause significant problems for states when their economies go south – leaving policy makers to face much tougher decisions about increasing revenue or reducing services.
At least 30 state legislatures have considered or are still considering tax bills this year – and most of them would reduce revenue, according to Stateline.org, a nonprofit website that tracks state policy. Only a few states are considering tax hikes.
The moves are the product, in part, of an improving economy that has reduced unemployment and bolstered state revenues – at least over the past few years. According to the U.S. Census Bureau, state revenues have grown for 16 straight quarters through the end of 2013.
But some of these tax cuts are also about competition. There is a war among states to offer corporations the cheapest environment in which they can do business.
It’s the new economic development model. Rather than offering an enormous package of incentives meant to lure a specific company that’s offering thousands of jobs, states are competing to be the place where every firm – large and small – wants to do business.
The goal is to bolster tax revenue by increasing the number of taxpayers. The idea has merit in theory. A broader, more diverse tax base is a stabilizing factor during a recession. But the race to lure business development is just that – a race. No state is standing still.
Gov. Mike Pence boasted that when Indiana’s new tax cut is fully implemented, the state will have the second lowest corporate rate in the nation. But there’s little chance that will actually be true.
That’s because the move by Indiana to reduce its income tax on businesses will likely spur other states to do so as well. Already this spring, New York lawmakers have approved a corporate tax cut – although its rate will not fall as far as Indiana’s. Wisconsin has passed corporate tax reforms and other states are considering whether to make changes as well.
And certainly, if Indiana is successful in attracting firms from other states throughout the next few years, those places are certain to react.
But there’s another problem with focusing on tax cuts. Reduced revenue puts funding for government services in jeopardy. And ironically, business leaders – the ones who are making the decisions about where to locate – care a lot about government services. Corporate execs don’t want to locate to areas without good schools, medical care and cultural amenities.
In fact, it’s big business that is clamoring for better mass transit in Central Indiana. It’s the Indiana Chamber of Commerce fighting for pre-kindergarten programs that could eventually cost the state some $250 million annually. Business leaders are looking for a progressive approach to building culturally conscious communities that keep young college grads from escaping to the coasts.
But if Indiana policy makers look back at their own history, they’ll see that some of their past tax cutting sprees left them vulnerable. When former Democratic Gov. Evan Bayh left office in 1997, the state boasted a huge budget surplus – much bigger than today’s when considered as a percentage of total spending.
But lawmakers frittered much of it away with a series of tax cuts meant to give some kind of reduction to almost everyone in the state. They realized later that the benefits were spread so widely that no one person noticed that big of a break. And when the next recession came along, the state was unprepared to weather it without cuts to schools and state services.
The situation was so serious in 2005 that when then-Republican Gov. Mitch Daniels took office, he proposed a temporary tax increase – one that lawmakers rejected. Eventually, Daniels and lawmakers brought the state’s finances under control – just in time for another recession, the largest since the Great Depression.
We’re now just a few years removed from that financial debacle and lawmakers in Indiana and other states appear to have caught the tax cut fever again. They should consider history before they get carried away.
Lesley Weidenbener is executive editor of TheStatehouseFile.com, a news website powered by Franklin College journalism students.
If the people of Indiana are unwilling participants in a race to the bottom they couldn’t pick a better scowler to lead them to victory than Pence.
Let’s slash those corporate tax rates. The business of Indiana is business. Any business. About time for a hefty sales tax increase. Regressive taxes are what we like, they free up cash to dump on those who don’t need it. They also facilitate bribing companies to locate in Indiana for as long as it suits their purposes.
Exactly.
We have one of the most regressive tax systems in the country and we live in one of the most polluted states in the country, not to mention relying 90+% on dirty coal and all its mercury, sulpher dioxide, and C02.
But, but but we have a balanced budget! (eye roll) thanks to billions in a federal governemnt UI loan and that “failed stimulus”.
+1000 to Bandana and Brains Benton
Thank you Ms Weidenbenner.
Indiana needs to use the money it has to improve the state to attract business if that is its aim, not try to bribe businesses to come here for a short stay. As was mentioned we live in a grossly polluted stated with a less than stellar uneducated work force who apparently wants to either work on an assembly line or collect unemployment. We need a big turn-around folks and cutting taxes to big business will not do it. The old ways of doing business do not work any more.
AS a matter of fact, our whole tax code as well as that of the federal government needs a complete overhaul. There is enough tax fraud at play right now every year to pay for improvements for our state and our country. What is the matter with our legislators both state and federal? Can they not grow up, get along, and do good for the country and state? If they want to cut federal spending for example, then improve the tax code. That would have the potential of saving the feds over $6 billion !!! per year. I know this for a fact since we were a victim of identity theft this year with our federal taxes. Our accountant reported the $6 billion figure to us having researched the issue. The IRS is getting scammed right and left. There is no other solution but to rewrite the tax laws and quickly. Same with state I would imagine.
lesley and her liberal minions continue to be a ball in high weeds….true conservatism works every time…….latest success….Mr.Walker Wisconsin’s Governor….http://www.forbes.com/sites/travisbrown/2014/03/28/the-nearly-2-billion-dollar-governor/
and i might add President Reagan’s recovery destroys the liberal community organizer clown barrys recovery…..http://www.forbes.com/2011/02/08/ronald-reagan-economics-taxes-opinions-contributors-john-heubusch.html
I’m sure that real “in-depth” article makes perfect sense to that ENIAC motor you got on your shoulders.
Nothing like comparing apples to gorillas there Jethroromo
We’ve discussed this ad nausem.
The end of the energy crises, Dem cooperation vs R intransigence, globalization(tax cuts don’t recirculate through the US economy as much as in the ’80’s) a thriving middle class and unions helps a recovery along vs the bar bell unequal economy we have now.
Besides Jethro I thought you gave up trying being a brain surgeon to become a double naught spy. Now you’re saying you gave up the secret agent business to become one of them there economists?
Have you talked to Uncle Jed or Aunt Pearl about this? There sure is a lot of ciphering to be done in economics.
I think all that cipherin’ has your head muddled. Better sit down and rest a minute. Then you better fetch those beans and fatback for granny before she goes lookin for a hickory switch.
and the destruction under clown barry continues……the beat goes on and the beat goes on….http://www.usdebtclock.org/
That debt number is fraudulent. Also how much of that debt has gone to our bloated crony military contractors.
Also your lord and savior Dick Cheney says deficits don’t matter…. just sayin, al.
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