Tax Foundation Archives - Shopfloor

Taxes ARE a Competitive Factor for Manufacturers

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Gov. Jack Markell of Delaware writes about state competitiveness and what’s needed to attract businesses in a Washington Post op-ed today, “Taxes are the wrong focus for economic growth. He raises many serious points toward which manufacturers will be sympathetic:

[Where] will the innovation come from if we don’t make necessary investments in federally funded research? Who will take innovation to market if we don’t help millions of workers retool their skills with appropriate job training? How will we get these new goods to market cost-effectively if we don’t improve our infrastructure? These are precisely the investments other nations are making. We must, too.

The NAM’s Manufacturing Strategy for Jobs and a Competitive America argues for the same priorities, among others. We’re with him.

Gov. Jack Markell of Delaware

Indeed, Gov. Markell, a Democrat, is a friend to manufacturing, and his State of the State address in January was right on the mark on how to encourage business.

Still, it seems to us that the Governor is offering a false dichotomy: tax competitiveness versus the other factors like R&D, skills and infrastructure. When Gov. Scott Walker of Wisconsin pounced on Illinois’ decision to raise income taxes by inviting companies to relocate to his state — a story Gov. Markell begins his column with — Gov. Walker was not just telling business he was going to keep taxes under control, he was sending the message that Wisconsin was going to put its entire house in order. A state that can’t balance its budget without a major tax increase is unlikely to set the other policy priorities needed to create a positive business climate.

The other consideration that Gov. Markell does not address is that competitiveness is really a global issue today. States continue to battle each other to attract business, but the real fight is on the country-to-country level.  Taxes are so critical in this competition,  and the United States is so far behind.

In the Tax Foundation’s latest Fiscal Fact, Scott Hodge reports, “Countdown to #1: 2011 Marks 20th Year That U.S. Corporate Tax Rate Is Higher than OECD Average“:

There is increasing recognition in Washington that the U.S. corporate tax rate is out of step with the lower tax rates of most industrialized and emerging nations. Indeed, 2011 marks the 20th year in which the U.S. statutory tax rate has been above the simple average of non-U.S. countries in the Organization for Economic Cooperation and Development (OECD).

It is now well known that with a combined federal and state corporate tax rate of 39.2 percent, the U.S. has the second-highest overall rate among OECD nations. Only Japan, with a combined rate of 39.5 percent, levies a higher rate.

As Gov. Markell points out, other countries’ governments are spending in critical areas like R&D, infrastructure and skills training. But here’s the point: They’re doing so even with corporate tax rates lower than in the United States.

Tax Reform and Lower Rates, a Painstaking Venture

By | Taxation | One Comment

Kevin Hall, McClatchy, “Business leaders wary of Obama’s plan to cut corporate tax rate“:

“Do I think it can be done? Yes. But it’s going to be very painstaking, it’s going to be difficult,” said Dorothy Coleman, the vice president of tax policy for the National Association of Manufacturers. “If it was easy, it would have been done a long time ago.”…

“I think our overall feeling on corporate tax rates is they should be as low as possible,” said NAM’s Coleman. She offered only a qualified endorsement because Obama said the lowering of corporate tax rates can’t add to the deficit, projected Wednesday by the nonpartisan Congressional Budget Office to hit a record $1.5 trillion this year.

“We support fiscally responsible tax reform, but starting from the beginning, that it’s got to be revenue neutral almost by definition means creating winners and losers,” Coleman said. “When you target one industry over another, that changes the conversation.”

USA TODAY, “Corporate tax rates beg for cut but reform tough to achieve, “Scott Hodge, head of the non-profit Tax Foundation, says tax reform is likely this year because Japan is slated to cut its corporate tax rate in April, giving the U.S. the highest rate. ‘We’ll have to do something,’ he says.”

Hodge covered the Japanese developments in a blog post last month, reporting that the cabinet of Prime Minister Naoto Kan had OK’d reducing the corporate tax rate by 5 percentage points, a move expected to be finalized when the Diat approves the government’s budget this spring.

Hodge also addresses the impact of the worldwide tax system — which the United States continues to use — versus the territorial tax system. Read More

State Tax Climates, Competitiveness, and Alas, Poor Illinois

By | Around the States, Economy, General, Taxation | No Comments

In our continuing coverage of State of the State addresses today, we noted these comments from governors of two very different states, New Jersey and Mississippi.

New Jersey Gov. Chris Christie: “If we cannot shed regulations, reduce spending, and hold the line on taxes, we cannot attract and create the jobs our citizens so desperately need.”

Mississippi Gov. Haley Barbour: “[Our] goal has to be to grow our economy faster than the nation as a whole, and we can do it. We have to focus on our advantages: low taxes, a friendly business climate, rational regulation, abundant natural resources and especially a first rate, affordable work force.”

Now comes Illinois, where lame-duck lawmakers approved Gov. Pat Quinn’s plan to balance the state budget and raised the personal income tax by 67 percent! The state’s business tax will go up by 46 percent! The Huffington Post reports that, according to the The Tax Foundationthe hike would force Illinois businesses to pay the highest combined national-local corporate tax rate in the industrialized world.

From The Chicago Tribune, “Quinn congratulates Democrats on income tax increase“:

A triumphant Gov. Pat Quinn congratulated fellow Democrats early today after the Illinois Senate and House sent him a major income tax increase without a single Republican vote in favor.

Quinn smiled and shook hands on the floor of the Senate around 1:30 a.m. after the Senate voted 30-29 for the bill, which would raise the personal income tax-rate by 67 percent and the business income tax rate by 46 percent.

If it’s a triumph, it’s of the Phyrric sort. Gov. Mitch Daniels of Indiana made two telling observations in interviews as reported in The Herald-Review, “Indiana governor says Illinois tax hike would be good news for his state“:

  • “We already had an edge on Illinois in terms of the cost of doing business, and this is going to make it significantly wider.”
  • “Folks in Illinois will eventually have to decide: Is this working well enough for us or do we want some-thing different? Point one of our anti-recession strategy here is to avoid doing what they’ve now decided to do.”

Tax Holidays, Consumer Behavior, and Competitiveness

By | General, Taxation | One Comment

This is the top half of a full page ad on the back of the A section of today’s Washington Post, prompted by Virginia’s tax holiday this weekend on the 5 percent sales tax for clothes and schools supplies.

Kohl’s must believe that lower taxes stimulate economic activity.

But is it good policy? In a recent study, The Tax Foundation reported, “Sales Tax Holidays Distort Consumer, Business Decisions, Provide Little Relief to Taxpayers“:

Eighteen states are offering sales tax holidays in 2010 – up from 16 in 2009 and 17 in 2008 – including 15 that exempt clothing, 10 for school supplies, six targeting computers, and five applied to Energy Star products. Tax Foundation Special Report, No. 182, “Sales Tax Holidays: Politically Expedient but Poor Tax Policy,” is available online at http://www.taxfoundation.org/publications/show/26533.html.

“Sales tax holidays are gimmicks designed to win political points for lawmakers,” said Tax Foundation Staff Economist Mark Robyn, who authored the paper with Tax Counsel and Director of State Projects Joseph Henchman and Adjunct Scholar Micah Cohen. “If lawmakers want to cut taxes, they should do so in a way that benefits everyone, no matter what they purchase or when they purchase it. Unfortunately, sales tax holidays only distract from genuine, permanent tax relief.”

Permanent, more competitive tax rates, then…


By | Economy, Taxation | No Comments

From the Heritage Foundation’s budget expert, Brian Riedl, an analysis of President Obama’s FY2011 budget, “Obama’s Budget Seeks $2 Trillion More in Spending and Deficits Than Last Year.” Riedl highlights the unprecedented deficit spending, but in discussing economic growth, the immediate concern should be the tax increases.

President Obama bases nearly all of his (modest) deficit reduction on tax increases. Although no economic theory justifies raising taxes during a recession, he would impose nearly $1 trillion in tax hikes for 3.2 million upper-income families and small businesses. He would eliminate tax breaks for charitable giving and the mortgage interest deduction for millions of Americans.

President Obama has endorsed a cap-and-trade bill that would cost more than $800 billion over the next decade. He has also endorsed substantial tax hikes to finance health care reform. All told, tax increases would exceed $2 trillion, yet they are still not enough to prevent a $1 trillion annual deficit by 2020.

In imposing these new taxes, the Obama Administration would damage the global competitiveness of U.S. manufacturers and other businesses.  A report by the Tax Foundation documents that U.S. competitors are going in the opposition direction, reducing corporate taxes to promote growth, “OECD Nations Continue Cutting Corporate Tax Rates While U.S. Stands Still (Federal Plus Provincial/State Corporate Tax Rates for OECD Countries, 2008-2009).

Less competitive = fewer sales = stagnation = fewer employees. So much for JOBS!

The recent analysis by the Milken Institute, “Jobs for America,” concludes that reducing the U.S. corporate income tax rate to match the OECD average would trigger new growth. By 2019, it could boost real GDP by $375.5 billion (2.2 percent), create an additional 350,000 manufacturing jobs, and increase total employment by 2.13 million.

Tax Credit for Hiring: It’s Not Even That Good of Politics

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From USA TODAY, “$5,000 tax credit for each new job a big part of Obama’s plan,” reporting on the President’s State of the Union reaffirmation of a campaign pledge, “I’m also proposing a new small business tax credit — one that will go to over one million small businesses who hire new workers or raise wages.”

There’s only one problem: Business groups say the credit won’t do much to boost hiring.

“I really don’t think it’s going to be much of an incentive,” says Bill Rys, tax counsel for the National Federation of Independent Business. “Mostly it is going to be used by businesses that would have been hiring anyway.”

The National Association of Manufacturers is promoting its own job-creation package, featuring a cut in corporate income tax rates and a more generous tax credit for research and development. The group considers those changes more important than the $5,000 tax credit.

“For those manufacturers who are looking to hire, this will help,” says spokeswoman Erin Streeter. “We don’t anticipate this tax credit being a reason for them to hire. Our members are going to hire if there is a long-term need.”

Erin is referring to the NAM’s new Milken Institute study, “Jobs for America.”

Very few people take the tax credit for hiring seriously as anything other than politics.

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Tax Foundation Rates the States: S.D., Tops; N.J., Bottom

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From the Tax Foundation, “Which States Are Best for Business? 2010 State Business Tax Climate Index“:

Washington, DC, September 22, 2009 — South Dakota has the most “business-friendly” tax system, and New Jersey has the least, according to the Tax Foundation’s 2010 State Business Tax Climate Index released today. The Index measures the competitiveness of the 50 states’ tax systems and ranks them accordingly based on the taxes that matter most to businesses and business investment: corporate income, individual income, sales, property and unemployment insurance taxes.

The states are scored on these taxes, and the scores are weighted based on the relative importance or impact of the tax to a business. Keeping a state competitive in today’s global marketplace can be difficult, but there is one factor lawmakers have direct control over: the quality of state tax systems. The Index measures how well a state’s tax system encourages investment by maintaining a broad tax base and low rates.

“When policymakers are considering tax changes in their states, they should remember two rules: Taxes matter to business, and states do not enact tax changes – increases or cuts – in a vacuum,” said Kail Padgitt, Ph.D., who authored Tax Foundation Background Paper No. 59, “2010 State Business Tax Climate Index.” The Index represents the tax climate of each state as of July 1, 2009, the first day of the standard 2010 fiscal year, and is available online at http://www.taxfoundation.org/research/show/22658.html.

California is 48, New York is 49. No surprise there.

More from NJBiz.

Global Competitiveness: Undermined by U.S. Corporate Taxes

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From The Tax Foundation, “As Industrialized Countries Cut Corporate Taxes, U.S. Rate Still Second-Highest“:

Washington, DC – Canada, the Czech Republic, Korea, and Sweden all cut their corporate tax rates in 2009, distancing the United States even further from the pack with its combined federal and state rate of 39.1 percent—second only to Japan for the highest corporate tax rate among nations in the Organization for Economic Cooperation and Development (OECD). A Tax Foundation analysis of new OECD data finds that 2009 marks the 12th consecutive year in which the U.S. corporate tax rate is higher than the average rate among non-U.S. OECD nations—and roughly 50 percent higher than that of a mid-ranked country such as Sweden.

“America’s high corporate tax rate should be a red flag to U.S. lawmakers worried about the country’s flagging economic growth, slow wage growth, and our overall global competitiveness,” write Tax Foundation President Scott Hodge and Summer Fellow André Dammert, who authored Tax Foundation Fiscal Fact No. 184, ” U.S. Lags While Competitors Accelerate Corporate Income Tax Reform.” The Fiscal Fact is available online at http://www.taxfoundation.org/publications/show/24973.html.

WSJ: The Small Business Surtax

By | Health Care, Taxation | No Comments

An editorial in today’s Wall Street Journal builds on the Tax Foundation report we cited yesterday about the effect of a income tax “surtax” to pay for health care. In “The Small Business Surtax,” the Journal notes the fact that the majority small businesses — including manufacturers — file their taxes as individuals, so Rep. Charlie Rangel’s proposed tax increase would hit jobs creators the hardest.

Another implication of the Rangel plan is that America’s successful small businesses would pay higher tax rates than the Fortune 500, and for that matter than most companies around the world. The corporate federal-state tax rate applied to General Electric and Google is about 39% in the U.S., and the business tax rate is about 25% in the OECD countries. So the U.S. would have close to the most punitive taxes on small business income anywhere on the globe…[snip]

A new study by the Kaufman Foundation finds that small business entrepreneurs have led America out of its last seven post-World War II recessions. They also generate about two of every three new jobs during a recovery. The more the Obama Democrats reveal of their policies, the more it’s clear that they prize income redistribution above all else, including job creation and economic growth.

The House Democrats are expected to release their health care legislative package today. Will jobs creation have any place in their plan?

Top Effective Marginal Rates under a 4-Percent Health Care Surtax

By | Health Care, Taxation | No Comments

From The Tax Foundation:

Funding for increases in the federal government’s spending on health care continues to be debated in Washington. The newest funding proposal floated by the House Ways and Means Committee is a surtax levied on married tax returns with adjusted gross incomes (AGI) over $250,000 and single returns earning above $200,000. While there is speculation as to what the actual surtax rate will be, the 4 percent figure seems to be the focal point.

A 4-percent federal surtax along with recent increases targeted at high-income taxpayers at the state level has led to concern over how high the top tax rates would be in each state, especially large states with very high top marginal tax rates like California and New York. Some researchers merely sum the rates at the federal, state and local level to give a statutory total tax rate. A more accurate method is to calculate the effective marginal tax rate. The effective marginal tax rate takes into consideration deductions and exclusions in order to present a truer measure of an individual’s rate. Technically, it is the change in tax liability for a $1 increase in income.

The entry has a full, state-by-state chart, but we’ll lead with the top five:

Top Effective Marginal Rates under a 4-Percent Health Care Surtax by State


Top State Rate

Top Federal Ordinary Rate

New Surtax

Medicare Tax

Top Effective Marginal Rate































Now there’s a list of economically vital states, eh?

And news coverage…