Corporate Tax Cuts to Stimulate Job Creation: They Never Work

We should be open to any legislation or tax policy that stimulates job creation. But we should also be on guard against legislation or policy that merely sounds good, without subjecting it to a rigorous evaluation of its costs and benefits. Among the West Virginia Legislature’s new Republican majority, it is fashionable to call for corporate tax cuts as a way to unleash job creation. Unfortunately, this thinking is more the product of ideology than of solid analysis. The idea of corporate tax cuts to stimulate job growth has one main problem – it never works.

New Senate President Mitch Carmichael (R-Jackson, 04) recently formed a Select Tax Reform Committee in the Senate, saying

We must examine every method to improve the West Virginia economy, and that certainly will include         comprehensive tax reform. Our focus is to create private sector jobs and opportunities for our citizens… Other states have achieved significant growth as a result of fundamentally overhauling their tax code. Why wouldn’t the West Virginia Senate pursue tax strategies that have a proven record of success in other states?

West Virginia is now facing a $400 million budget deficit. If the tax reform Sen. Carmichael describes will raise revenue now, he and his colleagues can be political heroes. On the other hand, if he intends to cut taxes – losing present revenue – in exchange for uncertain future job growth, he is on a fool’s errand.

West Virginia has relentlessly cut corporate taxes in the past decade. In the period 2007 to 2014, the Legislature reduced the business franchise tax from .7% to zero and reduced the corporate net income tax rate from 9% to 6.5%. Yet West Virginia is still a laggard in job creation and there are many of our fellow citizens unable to find work. It is regrettable that our leaders do not demand a thorough evaluation of the effectiveness of these earlier tax cuts before embarking on new ones. But West Virginia is not alone in this.

Our neighbor Ohio has shot itself in the foot over the last decade by cutting corporate taxes almost to zero in the hopes of stimulating job growth with no real success. Between 2005 and 2010, Ohio sharply reduced income tax rates and eliminated Ohio’s corporate income tax. While the country as a whole has gained jobs since then, Ohio has lost jobs. More recently, Ohio passed a tax-cut package that included income tax reductions and business-owner tax breaks. Yet Ohio job growth continues to lag the country as a whole.

Then there is the Kansas experience.  Led by Republican Governor Brownback in 2013, the Kansas Legislature passed a series of tax cuts on owners of “passthrough” businesses that opened up a $420 million budget deficit.  The Topeka Capital Journal later reported the rueful comments of one Republican legislator, who said that the evidence didn’t exist that the tax cuts led to meaningful growth and probably never would.

Why don’t corporate tax cuts work to stimulate job growth? There are several reasons.

• tax cuts are like handing corporations a big check with no requirement that they spend the money on creating more jobs;
• often the tax cuts go directly to a corporation’s bottom line to be distributed to out-of-state shareholders and other owners;
• if the tax cuts are actually spent by corporations they can easily be spent in other states, or in ways that do not create jobs, such as part of bloated CEO pay;
• corporate income taxes are such a small part of the cost of doing business in a particular state that cutting taxes will not be an inducement to locate new business in West Virginia versus other states; and
• corporate tax cuts increase the likelihood of budget deficits that will result in spending cuts on public services that corporations value in locating new business, such as police, fire protection, good schools and recreation.

Of course, we expect our Legislature to adopt a workable budget, filling the deficit hole while generating enough to sustain and expand the important work that only government can do. None of us should criticize the Legislature for action and innovation. But corporate tax cuts are not the answer if we simply hope they will stimulate job creation.

If tax reduction is so important, why not link it to job creation in some accountable way? Why couldn’t we offer a tax credit to small business that would be eliminated for that business the next year if it has not created a certain number of new jobs? This scheme is familiar to state and county development authorities because it is sometimes used in the arrangements with corporations that receive tax inducements to open a new factory. And it would be similar to the “pay for performance” that corporations love. But in this case if corporations don’t perform by creating new jobs, they don’t get paid with state tax revenues.