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The president’s State of the Union address this week focused on job growth, and that must be a top priority for the White House and, in particular, Congress, which has constitutional authority over taxation — a key component of job growth and fixing the ailing economy.
As the House and the Senate move forward on comprehensive tax reform — which is badly needed — our leaders in Washington should take a cue from state legislators across the nation looking for ways to be more attractive to businesses and employers.
Rhode Island, Minnesota and Florida are among the growing number of states trying to make themselves more economically competitive by reducing their respective corporate income tax rates.
While the premise may seem antithetical to some — reducing tax rates to improve the economy — the practice of lowering corporate taxes has a successful history of attracting new business and industry and broadening the tax base through increased employment.
There are other efforts in state capitals to lower corporate taxes as well, mainly for the same reasons. Lawmakers in Maryland who want to make that state compete more favorably than neighboring Virginia are calling for lower corporate taxes. The situation in New Mexico is similar, with the state trying to get on a better competitive footing with its neighbors in the Southwest.
These efforts in state capitals are being led by both Democrats and Republicans. That’s good news because anything that gets accomplished in Washington these days has to be bipartisan.
If what’s happening in state legislatures represents a microeconomic picture of taxes and the economy, a similar phenomenon is playing out on the macroeconomic front of the global economy. The issue came to something of a head last spring when Japan announced a reduction in its corporate income tax rate, giving the United States the dubious distinction of having the highest corporate tax rate among all developed nations on earth.
The United Kingdom has announced a series of rate cuts over time that would lower its corporate taxes in an effort to keep British companies from relocating to other nations offering lower rates. Canada, Finland, Greece and New Zealand have also cut their corporate tax rates, making it more difficult to attract and retain business in the high-tax nation that is the United Kingdom. Even Italy is offering more tax relief than some of its European Union peers.
With luck, the push for lower corporate taxes will move from the states and the international business community to Washington and the Congress. For the time being, there are signs that we may be seeing some sentiment towards doing so.
Some see signals that Congress and the Obama administration might be willing to discuss a territorial tax system for the United States, in which profits earned overseas by multinational American companies can be brought back to American shores. Such profits are currently taxed by the nation in which the money is earned but face a second layer of taxation when the money is brought stateside, with a tax credit provided to cover the taxes levied by the host nation.